Production and Operation Management Exam

Weakness of AAR Method

Use of accounting values rather than cash flows, no account of timing, and arbitrary target rate

3 attributes to NPV

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

The net present value of a projects cash flows is divided by the _________ to calculate the profitability index

Initial investment

The dollar difference in value between mutually exclusive projects can be found by calculating the _______ of the incremental cash flows

NPV

The dollar difference in value between mutually exclusive projects can be found by calculating the _______ of the incremental cash flows.

NPV

The ________ method is ideal for companies with limited funds that have a need for a quick turnaround of their capital

Payback

For normal cash flows (the outflows occur before the inflows), the NPV is ________ if the discount rate is less than the IRR, and it is ______ if the discount rate is greater than the IRR

Positive, negative

the discount rate is determined by the _______ of a project

Risk

The internal rate of return is a function of?

a projects cash flows

The decision rule for a project for which the first cash flow is an inflow and subsequent cash flows are negative states that we should _______ the project when the IRR is ________ than the discount rate.

accept;less Reject;greater

The property of value ________ implies that the contribution of any project to a firms value is simply the NPV of the project

additivity

The average accounting return is calculated as the average net income from a project divided by the ?

average book value of the investment

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

budgeting

Internal rate of return must be compared to the _________ rate in order to determine the acceptability of a project

discount

Weaknesses of discounted payback period

exclusion of some cash flows, loss of simplicity as compared to the playback method, and arbitrary cutoff date

The payback period can lead to incorrect decisions if it is used too literally because it

ignores cash flows after the cutoff date

Captal rationing requires a company to

limit their investments

The capital budgeting method allows lower management to make smaller, everyday financial decisions easily is:

payback method

In capital budgeting, the net ______ is the value of a project to the company.

present value

Weaknesses of payback method

the cutoff date is arbitrary, cash flows received after the payback period are ignored, and the time value of money principles are ignored

the IRR is the discount rate that makes the NPV of a project equal to

zero

What does value additivity mean for a firm?

The value of a firm is simply the combined value of the firms projects, divsions, and entities owned by the firm. The npv values of individual projects can be added together.