Finance 330 Chapter 8 Smartbook

In general, NPV is ______. (3)

- Equal to zero when the discount rate equals the IRR - Negative for Discount Rates above the IRR - Positive for Discount Rates below the IRR

Which of the following are weaknesses of the payback method? (3)

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

Which of the following present problems when using the IRR method? (2)

- mutually exclusive projects - nonconventional cash flows

The basic NPV investment rule is: (3)

-accept a project if the NPV is greater than zero -reject a project if its NPV is less than zero -if the NPV is equal to zero, acceptance or rejection of the project is a matter of indifference

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

accept

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

accepted

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

accepts

The profitability index is also called the ______ ratio.

benefit-cost

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

budgeting

True or false: The PI always results in correct decisions in comparisons of mutually exclusive investments.

false

The profitability index is calculated by dividing the PV of the ______ cash inflows by the initial investment.

future

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

independent

The present value of the future cash inflows are divided by the ______ to calculate the profitability index.

initial investment

Capital budgeting is probably the most important of the three key areas of concern to the financial manager because ______.

it defines the business of the firm

If a firm is evaluating two possible projects, both of which require the use of the same production facilities, and taking one project means that we cannot take the other, these projects would be considered ______.

mutually exclusive

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

net present value

One of the flaws of the payback period method is that cash flows after the cutoff date are ______.

not considered in the analysis

The ______ method evaluates a project by determining the time needed to recoup the initial investment.

payback

The NPV is Blank______ if the required return is less than the IRR, and it is Blank______ if the required return is greater than the IRR.

positive; negative

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

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

required return

Which of the following is a disadvantage of the payback period rule?

requires an arbitrary cutoff point

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

true

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

zero

The multiple rates of return problem is the possibility that more than one discount rate may make the net present value of an investment equal to ________

zero

______ is a measure of how much value is created or added by undertaking an investment.

Net present value

True or false: The payback period takes into consideration the time value of money.

False

True or false: The profitability index rule for an independent project states that, if a project has a positive NPV, then the present value of the future cash flows must be smaller than the initial investment.

False

Which of the following is a disadvantage of the profitability index?

It cannot rank mutually exclusive projects.

True or false: A project with nonconventional cash flows will produce two or more IRRs.

True

The internal rate of return is a function of ______.

a project's cash flows