FIN 357 Chapter 9

____ budgeting is the decision-making process for accepting and rejecting projects.

Capital

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

Discounted payback period

Using the payback period rule will bias toward accepting which type of investment?

Short-term investment

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

a target average accounting return

A project should be __________ if its NPV is greater than zero.

accepted

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

book

Capital ______ is the decision-making process for accepting and rejecting projects.

budgeting

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

false

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

ignores cash flows after the cutoff date

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

initial investment

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

By ignoring time value, the payback period rule may incorrectly accept projects with a (positive/negative) NPV.

negative

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

not conventional

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

payback

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

This capital budgeting method allows lower management to make smaller, everyday financial decisions effectively.

payback method

Net ____ value is a measure of how much value is created or added today by undertaking an investment.

present

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

present value

The payback period method allows lower management to make (smaller/larger), everyday financial decisions effectively.

smaller

The payback period rule ______ a project if it has a payback period that is less than or equal to a particular cutoff date.

suggests accepting

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

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

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?

1. Internal rate of return 2. Net present value

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?

1. Net present value 2. Internal rate of return

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

1. projects are mutually exclusive 2. cash flows are not conventional