Chapter 9 Smartbook

The payback period can lead to incorrect decisions if it is used too literally because it ____.

ignores cash flows after the cutoff date

The profitability index is calculated by dividing the PV of the _________ cash flows by the initial investment.

future

Which of the following are mutually exclusive investments?

- A restaurant or a gas station on the same piece of land. - Two different choices for the assembly lines that will make the same product.

In which of the following scenarios would IRR always recommend the wrong decision?

Starting cash flow: 1000 Ending cash flow: -2000

The internal rate of return is a function of ____.

a project's cash flows

The present value of all cash flows (after the initial investment) is divided by the ______ to calculate the profitability index.

initial investment

Which capital budgeting decision method finds the present value of each cash flow before calculating a payback period?

Discounted payback period

According to Graham and Harvey's 1999 survey of 392 CFOs, which of the following two capital budgeting methods are most used by firms in the United States?

- Net present value - Internal rate of return

The amount of time needed for the cash flows from an investment to pay for its initial cost is the _____ period.

payback

The point at which the NPV profile crosses the horizontal axis is the:

internal rate of return

The point at which the NPV profile crosses the vertical axis is the:

sum of the cash flows of the project

The discounted payback period has which of these weaknesses?

- Arbitrary cutoff date - Exclusion of some cash flows - Loss of simplicity as compared to the payback method

The IRR rule can lead to bad decisions when _____ or _____.

- cash flows are not conventional - projects are mutually exclusive

True or false: Based on the discounted payback rule, an investment is acceptable if its discounted payback is less than some prespecified number of years.

true

According to the average accounting return rule, a project is acceptable if its average accounting return exceeds:

a target average accounting return

The PI rule for an independent project is to ______ the project if the PI is greater than 1.

accept

Payback period tells the time it takes to break even in an ____ sense. Discounted payback period tells the time it takes to break even in an ______ or financial sense.

accounting economic

The ____ rate is the rate at which the NPVs of two projects are equal.

crossover

An independent project ____ rely on the acceptance or rejection of another project.

doesn't

The AAR ____ incorporate time value of money.

doesn't

The discounted payback is the time it takes to break even in an ____ or financial sense.

economic

A situation in which taking one investment prevents the taking of another is called a mutually ____ investment decision.

exclusive

One of the main disadvantages of the discounted payback period rule is that the cutoff is arbitrarily set and cash flows beyond that point are:

ignored

A(n) ______ project does not rely on the acceptance or rejection of another project

independent

The IRR can lead to the wrong decision when cash (inflows/outflows) occur before cash (inflows/outflows).

inflows, outflows

With nonconventional cash flows, there is a possibility that more than one discount rate will make the NPV of an investment zero. This is called the rates ____ of return problem.

multiple

The IRR rule can lead to bad decisions when cash flows are _____ or projects are mutually exclusive.

not conventional

The profitability index will be bigger than one for a negativeBlank 1Blank 1 negative , ____ NPV investment and less than one for a negative ____ NPV investment.

postive, negative

Which of the following are weaknesses of the payback method?

- Cash flows received after the payback period are ignored. - The cutoff date is arbitrary. - Time value of money principles are ignored.

Which of the following are advantage(s) of AAR?

- Is easy to compute. - Needed information is usually available.

If a project has multiple internal rates of return, which of the following methods should be used?

- NPV - MIRR

Based on the average ____ return rule, a project is acceptable if its average ____ return exceeds a target average ____ return.

accounting, accounting, accounting

The AAR is calculated by taking the average net income and dividing it by the average ____ value.

book

Based on the ____ payback rule, an investment is acceptable if its ____ payback is less than some prespecified number of years.

discounted, discounted

True or false: The MIRR function eliminates multiple IRRs and should replace NPV.

false

According to the basic IRR rule, we should _____.

reject a project if the IRR is less than the required return

If the IRR is greater than the _______ ________, we should accept the project.

required return

Based on the average accounting return rule, a project is acceptable if its average accounting return exceeds a ____ average accounting return.

target

The spreadsheet function for calculating net present value is ____

=NPV()

According to Graham and Harvey's 1999 survey of 392 CFOs, in addition to IRR and NPV, which were the two most widely used techniques, over half of the respondents always, or almost always, used which of the following methods?

Payback Method

True or false: The crossover rate is the rate at which the NPVs of two projects are equal.

true

Capital Corp is considering a project whose internal rate of return is 14%. If Capital's required return is 14%, the project's NPV is:

zero

The IRR is the discount rate that makes the NPV of a project equal to ______.

zero

True or false: IRR approach may lead to incorrect decisions in comparison of two mutually exclusive projects.

true

True or false: Some projects, such as mines, have cash outflows followed by cash inflows, which are then followed by cash outflows, giving the project multiple rates of return.

true