Finance 311: Chap 9

The discounted payback period has which of these weaknesses?

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

The basic NPV rule

-If the NPV is equal to zero, acceptance or rejection of the project is a matter of indifference. -Accept a project if the NPV is greater than zero -Reject a project if its NPV is less than zero

What are the advantages of the payback period method for management?

-The payback period method is easy to use. -It allows lower level managers to make small decisions effectively. -The payback period method is ideal for minor projects.

By ignoring time value, the payback period rule may accept projects with a ________ NPV.

negative

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

payback method

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

reject

According to the basic IRR rule, we should____

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

Payback Period

the amount of time required for an investment to generate cash flows sufficient to recover its initial cost

Capital Budgeting

the process of planning and managing a firm's long-term investments

The three attributes of NPV are that it:

uses cash flows, discounts the cash flows properly and uses all the cash flows of a project.

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

Which of the following are mutually exclusive investments?

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

The internal rate of return is a function of ____.

A project's cash flow

Payback period tells the time it takes to break even in an _________ sense.

Accounting

How does the timing and the size of cash flows affect the payback method?

An increase in the size of the first cash inflow will decrease the payback method, all else held constant

Discounted payback period tells the time it takes to break even in an _______or financial sense.

Economic

IRR continues to be very popular in practice, partly because:

It gives a rate of return rather than a dollar value

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

NPV & MIRR

When cash flows are conventional, NPV is ______.

Positive for discount rates below the IRR, equal to zero when the discount rate equals the IRR, and negative for discount rates above the IRR.

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

Projects are mutually exclusive, cash flows are not conventional.

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

Required Return

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

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

Sum of the cash flows of the project