FIN 370T: Finance For Business
What value should be used to discount the cash flow that occurs in time period N when computing a net present value?
(1 + i)N
Which of these project PI's indicate a reject decision? Select all that apply.
- 0.9 - 0
You are considering two mutually exclusive projects, A and B. Which of these options do you have? Select all that apply.
- Accept B, reject A - Reject both A and B - Accept A, reject B
How are non-normal cash flows modified for MIRR purposes? Select all that apply.
- All cash outflows are moved to time zero. - All cash inflows are moved to the end of the project
Which of these apply to the payback method? Select all that apply.
- Easy to compute - Considers the total dollar cost of the initial investment
Which of these defines the internal rate of return (IRR)? Assume the cash flows are normal. Select all that apply.
- The interest rate that causes the NPV to equal zero. - The interest rate that causes NPV to equal (-1)(Cash flow at time 0)
Which of these is a weakness of the payback method? Select all that apply.
- The present value of the inflows is ignored. - All cash flows after the payback period are ignored.
Which of these are strengths of the MIRR process? Select all that apply.
- The reinvestment rate assumption is more reasonable than in the IRR process. - Non-normal cash flows can be converted into normal cash flows.
What does a positive net present value (NPV) represent?
A project more than covers all of its necessary costs
Which one of these statements is correct?
A zero NPV indicates a project's discounted cash inflows equal the discounted cash outflows.
Which one of these correctly states the accept rule for the payback statistic?
Accept any project that pays back within the maximum allowable period
What is the profitability index (PI) accept rule?
Accept when PI > or = 1
What is the accept decision rule for discounted payback (DPB)?
Accept when the DPB is equal to or less than the maximum allowable period
You are considering three mutually exclusive projects. Which one of these options is immediately eliminated as a possible decision?
Accepting more than one project
Which of these requires modification so MIRR can be applied to non-normal cash flows?
All cash outflows that occur at any time other than time zero
Rate-based decision statistics are popular because managers like to compare the expected rate of return to which one of these?
Borrowing rates
Why is the IRR formula set equal to zero?
By definition, IRR is the interest rate that makes the summation of the present values of all the cash flows equal zero.
Which of the following do you require in order to calculate the NPV of a project?
Discount rate
How can the profitability index (PI) be defined?
Dollar return per dollar invested
Rate-based decision statistics provide a rate of return based on which one of these?
Each $1 of investment
Which one of these is the primary advantage of the payback method?
Easy to compute
What type of return are firms seeking when considering a real asset project?
Economic profit
A project has cash flows of -$400, $200, $200, -$100, $300, and -$50. How many x-axis intersection points will the NPV profile for this project have?
Four
An accept decision for an independent project does which one of these?
Has no affect on accept/reject decisions for other projects
Which one of these is a weakness of MIRR?
MIRR ignores project sizes.
Which one of these is an advantage of the net present value (NPV) method?
NPV can be used with both independent and mutually exclusive projects.
What is the definition of net present value (NPV)?
NPV is a technique that generates a decision rule based on the total discounted values of a project's lifetime cash flows.
The profitability index (PI) is most closely associated with which other decision method?
Net present value (NPV)
Which one of these capital budgeting techniques is preferred for most projects?
Net present value (NPV)
What does the term "mutually exclusive projects" imply?
Only one of the two or more projects can be accepted.
A project has been assigned a maximum allowable payback period of 2.5 years. How is the reject decision expressed for this project?
PB > 2.5 years
A project has an initial cost of $1,800 and cash flows of $700, $1,100, and $900 for years 1 to 3, respectively. The discount rate is 8 percent. Should the project be accepted or rejected according to discounted payback (DPB) if the maximum allowable period is two years?
Rejected; DPB = 2.29 years
Which one of these is the IRR benchmark?
Required rate of return
In the NPV formula, what does CF0 represent?
The cash flow at time zero, or the project start-up costs
What does the net present value (NPV) of a project represent?
The expected increase in wealth from accepting a project
What is the internal rate of return (IRR)?
The implicit expected geometric average of a project's rate of return
Which one of these best describes the NPV profile given non-normal cash flows?
The profile will switch from downward-sloping to upward-sloping at least once.
How can the IRR benchmark best be described?
The rate required by investors to compensate for a project's level of risk
What is the discounted payback method designed to compute?
The time period required to return the initial investment plus interest
Which one of these is a weakness of the payback method?
The time value of money is ignored.
Why do firms purchase real assets in the form of capital equipment?
To create value for their customers
True or false: For most projects, net present value is the generally preferred method for making capital budgeting decisions.
True
Explain the disadvantage of the net present value (NPV) method.
Uninformed managers may compare the NPV value to the cost of the project rather than to the benchmark value of zero.
When is a cash flow not discounted when using the discounted payback method for project analysis?
When the cash flow occurs at time zero
In order to use the IRR to make a decision on whether to accept or reject the project you require the appropriate ______.
discount rate
To solve for the IRR statistic, set NPV equal to __________.
zero
