Finance Chapter 9 Connect

The IRR rule can lead to bad decisions when

-Cash flows are not conventional -Projects are mutually exclusive

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

-MIRR -NPV

When Cash Flows are Conventional the NPV is

-Negative for discounted rates above the IRR -Positive for discount rates above the IRR -Equal to zero for the discount rates equal to the IRR.

The discount payback period has which weaknesses

-arbitrary cutoff date -loss of simplicity as compared to the payback method -exclusion of some cash flows

Which of the following are advantages of AAR

-easy to compute -needed information is always available

what are the advantages of the payback period for management?

-it allows lower level management to make decisions effectively. -the payback method is easy to use -It is ideal for short projects

Which of the following are weaknesses of the payback period?

-the cutoff date is arbitrary -cashflows received after the payback period are ignored. -time value of money principles are ignored.

Which of the following are mutually exclusive events?

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

the three attributes of NPV are

-uses cash flows -discounts the cash flows properly -uses all the cash flows of a project

average accounting return

=some measure of average accounting profit/some measure of average accounting value =Average net income/ Average book value

The Steps involved in the discounted payback period in order started with the first step

Discount the cash flows using the discount rate. Add the discounted Cash Flows Accept if the discounted period is less than a specified number of periods.

The Present Value of all Cash Flows (after the initial investment) is divided by the ----- to calculate the profitability index.

Initial Investment

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

Payback method

The three attributes of NPV are that it

Uses cash flows uses all cash flows of a project discounts the cash flows properly

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

accept

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 profitability index is calculated by dividing the ------ (cash flows) values by the initial investment

future

The point at which the npv profile crosses the horizontal axis is the

internal rate of return

When cash flows are conventional, the npv is ---- to the discount rate is above the irr.

negative

amount of time needed for the cash flow from an investment to pay for its initial cost

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

In capital budgeting, the net -------- determines the value of the company to the project

present value

If IRR is greater than the ________ ____________ we should accept the project

required return

The point at which the npv profile crosses the vertical axis is the

sum of the cash flows of the project

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

the crossover rate is the rate at which the NPVs of two projects are equal

true

considering project whose internal rate of return is 14%. If required rate of return in 14 percent the projects NPV is

zero