Corp Finance CH 9 Learnsmart
True/False: the MIRR function eliminates multiple IRRs and should replace NPV
False
True/False: the crossover rate is the rate at which the NPVs of two projects are equal
True
A project should be ____ if its NPV is greater than zero
accepted
The discounted payback period has which of these weaknesses?
arbitrary cutoff date, loss of simplicity as compared to the payback method, exclusion of some cash flows
When cash flows are conventional, NPV is ____
positive for discount rates below the IRR, negative for discount rates above the IRR, equal to zero when the discount rate equals the IRR
In capital budgeting, the net __ determines the value of a project to the company
present value
The IRR rule can lead to bad decisions when ___ or ___
projects are mutually exclusive, cash flows are not conventional
The three attributes of NPV are that it:
uses all the cash flows of a project, uses cash flows, discounts the cash flows properly
Steps involved in the discounted payback period in order are
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 is the PI for a project with an initial cash outflow of $30 and subsequent cash inflows of $80 in Year 1 and $20 in Year 2 if the discount rate is 12 percent?
2.91 PI= [(80/1.12)+(20/1.12^2)]/30
The present value of all cash flows after the initial investment is divided by the _____ to calculate the profitability index
initial investment
According to Graham and Harvey's 1999 survey of 392 CFOs, which of the following two capital budgeting methods are most used by firms in the U.S. and Canada?
internal rate of return, net present value
When cash flows are conventional, NPV is ____ if the discount rate is above the IRR
negative
the basic NPV investment rule is:
reject a project if its NPV is less than zero, accept a project if its NPV is greater than zero, If the NPV is equal to zero then acceptance or rejection of the project is a matter of indifference
Capital Corp is considering a project whose internal rate of return is 14%. I f Capital's required return is 14%, the project's NPV is:
zero IRR=Return then NPV=0
What is the NPV of a project with an initial investment of $95, a cash flow in one year of $107, and a discount rate of 6%?
$5.94 NPV=-95+(107/1.06^1)
Saxon Company is considering a project that will generate net income of $50000 in Year 1, $75000 in Year 2, and $90000 in Year 3. The cost of the project is $700000, and this cost will be depreciated to zero in three years of the investment. What is their average accounting return?
20.48% average net income is (50000+75000+90000)/3=71670. The average accounting return is 71670/350000=20.48%
What is the IRR for a project with an initial investment of $250 and subsequent cash inflows of $100 per year for 3 years?
9.7% Calculate in excel
True/False: investing more money in a project is a guarantee of greater profits
False
If a project has multiple internal rates of return, which of the following methods should be used?
MIRR, NPV
Project Alpha's NPV profile crosses the vertical axis at $230000. Project Beta's NPV profile crosses the vertical axis at $15000. If Projects Alpha and Beta have conventional cash flows, are mutually exclusive events and the NPV profiles cross at 15% (where the NPVs are positive), which of the projects has a higher internal rate of return
Project Beta
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
NPV ____ cash flows properly
discounts
