Corporate Finance Ch. 5

What is the IRR for a project with an initial investment of $250 and subsequent cash inflows of $100 per year for 3 years?

9.7%

What does value additivity mean for a firm?

The NPV values of individual projects can be added together.

The internal rate of return is a function of ____.

a project's cash flows

The property of value ______ implies that the contribution of any project to a firm's value is simply the NPV of the project.

additivity

Internal rate of return (IRR) must be compared to the ______ rate in order to determine the acceptability of a project.

discount

A project with a cash inflow of $200 followed by a cash outflow of (-$250) one year later will have an IRR of ___ percent.

25

A project with a cash inflow of $185 followed by a cash outflow of (-$250) one year later will have an IRR of ___ percent.

35

The discount rate assigned to a project reflects the ____. a. sunk cost incurred by the investor b. risk of the project c. current interest rate set by the Fed d. opportunity cost to the investor

b, d

NPV ____ cash flows properly

discounts

In capital budgeting, the net ______ is the value of a project to the company.

present value

Capital ______ occurs when a firm doesn't have enough capital to fund all its positive NPV projects.

rationing

True or false: Two challenges with the IRR approach when comparing two projects are scale and differing cash flow patterns over time.

true

In capital budgeting, the net present value is the value of a project's ______ to the company.

cash flows

The IRR is the _________ that makes the NPV of a project equal to zero.

discount rate

True or false: A project with an initial cash outflow followed by a cash inflow has an NPV that is positively related to the discount rate.

false

True or false: Investing more money in a project is a guarantee of greater profits.

false

What are non-conventional cash flows?

fluctuations of inflows and outflows

The most important alternative to NPV is the ______ method.

internal rate of return

Capital rationing requires a company to ____.

limit their investments

Higher cash flows earlier in a project's life are ______ valuable than higher cash flows later on.

more

When an initial cash outflow is followed by cash inflows, NPV is ______ if the opportunity cost of capital is greater than the IRR.

negative

For "normal" cash flows (the outflows occur before the inflows), the NPV is ______ if the discount rate is less than the IRR, and it is ______ if the discount rate is greater than the IRR.

positive, negative

You must know the discount rate to compute ____, while the discount rate is necessary to apply ___.

NPV, IRR

What is the internal rate of return (IRR)?

The discount rate that makes the NPV of an investment 0.

True or false: The scale of a project can be an issue with IRR when choosing between mutually exclusive projects.

True

Which of the following are true for a project with a negative initial cash flow followed by positive cash flows? a. Accept if NPV is greater than zero. b. Accept if IRR is less than the market rate of financing c. Reject if IRR is greater than market rate of financing.

a

True or false: A project with an initial cash outflow followed by a cash inflow has an NPV that is negatively related to the discount rate.

true