Finance ch 9
if a project has multiple internal rates of return, which of the following methods should you use?
-NPV -MIRR
the most important alternative to NPV is the ____ method
IRR
the point at which the NPV profile crosses the vertical axis is the
sum of cash flows of the project
True or false: Based on the discounted payback rule, an investment is acceptable if its discounted payback is less than some prespecified number of years
true
the IRR rule can be lead to bad decision when _____ or ____
Projects are mutually exclusive, cash flows are not conventional.
which of the following are mutually exclusive investments?
- 2 different choices for the assembly lines that will make the same product - a restaurant or gas station on the same piece of land
according to Graham and Harveys 1999 survey of 392 CFOs, which of the following two capital budgeting methods are most used by firms in the United States?
- net present value - internal rate of return
arrange the steps involved in the discounted payback period in order starting with the first step
1. Discount the cash flows using the discount rate. 2. Add the discounted cash flows. 3. Accept if the discounted payback period is less than some pre-specified number of years.
what are the advantages of the payback period method for management
1. the payback period method is easy to use 2. it allows lower level managers to make small decisions effectively 3. the payback period method is ideal for short projects
the three attributes of NPV are that it
1. uses all the cash flows of a project 2. uses cash flows 3. discounts the cash flows properly
how does the timing and the size of cash flows affect the pay back method? assume the project does pay back within the projects lifetime
An increase in the size of the first cash inflow will decrease the payback period
the payback period rule ____ a project if it has a payback period that is less than or equal to the particular cut off date
accepts
payback period tells the time it takes to break even in an ___ sense. Discounted payback period tells the time it takes to break even in an ____ or financial sense.
accounting; economic
capital _______ is the decision-making process for accepting and rejecting projects.
budgeting
IRR continues to be very popular in practice, partly because
it gives a rate of return rather than a dollar amount
this capital budgeting method allows lower management to make smaller, everyday financial decisions effectively
payback method
the amount of time needed for the cash flows from an investment to pay for its initial cost is the
payback period
for a project with conventional cash flows, the NPV is _____ if the required return is less than the IRR, and it is ____ if the required return is greater than the IRR.
positive, negative
true or false: IRR approach may lead to incorrect decisions in comparison of two mutually exclusive projects
true
an _____ project does not rely on the acceptance or rejection of another project
independent
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
when cash flows are conventional, NPV is ___
-Positive for discount rates below the IRR, -equal to zero when the discount rate equals the IRR, -negative for discount rates above the IRR.
true or false: the crossover rate is the rate at which the NPVs of two projects are equal
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 (Whenever subsequent cash flows are both negative and positive, multiple internal rates of return may occur)
True or false: the MIRR function eliminates multiple IRRs and should replace NPV
false
true or false : investing more money in a project will always lead to greater profits
false
in capital budgeting, the net ____ determines the value of a project to the company
present value
internal rate of return (IRR) must be compared to the ______ in order to determine the acceptability of a project
required return