Exam 1 part 2
The payback method:
Applies mainly to projects where the actual results will be known relatively soon.
The payback method of analysis
has a timing bias.
The term tax shield refers to a reduction in taxes created by
noncash expenses
If you want to review a project from a benefit-cost perspective, you should use the _____ method of analysis.
profitability index
The increase in cash flow generated as a result of a firms tax deductible depreciation expense is called the
Depreciation tax shield
The internal rate of return for a capital project is best defined as the
Discount rate that causes the net present value to equal zero
A conventional investment project should be accepted if the internal rate of return is
Equal to or greater than the discount rate
The most effective method of directly evaluating the financial situation performance of a firm is to compare the financial ratios of the firm to:
Firms ratio from prior time and the ratios of firms with similar operations
Assume you use all the available methods to evaluate to manually exclusive capital projects if the IRR method results in a conflict in the indicated except/reject decision you should
Ignore the RR and rely on the decision indicated by the NPV method
The cash flow project should
Include all incremental an opportunity cost
The _______ When employed as a project discount rate makes the net present value of the project exactly equal to zero
Internal rate of return
Last year so and Stewart had price earning ratios of 12 and earnings per share and $.97 this year the price earning ratio 16 in the Ernie's bar sure is $.97 based on this information it can be stated with certainty that
Investors outlook for the firm has improved
And investment is acceptable to pay back period
Is less than some pre-specified period of time
The probability index
Is useful as a decision to when investment funds are limited and all available funds are allocated
One reason payback may be employed to analyze independent capital projects is because:
It is easy and quick to calculate
The greater the inventory turnover value
Last time inventory remains on him before being sold
A situation in which excepting one investment prevents acceptance of another investment is called
Mutually exclusive investment decision
The ___________ Is the difference between the present value of an investment future cash flows and it's initial cost
Net present value
An ______ Is the most valuable investment forgone if an alternative investment is chosen
Opportunity cost
Assume a firm is more concerned about quickly recovery it's initial investment that it is about the amount of value created according the form is most likely to employ the _______ Method of capital project analysis
Payback
The _______ is the links of time required for an investment to generate cash flow is sufficient to recover the initial cost of the investment
Payback period
Interest rates that I've been ingested for the effect of inflation are called
Real rates
Which of the following for the best example of two mutually exclusive projects
Renting out a company warehouse or selling it outright
The payback method
Requires an arbitrary choice of a cut off point
Float swimwear generate six sins net income for every one dollar in equity that's float has a ________ of 6 percent
Return on equity
Assume you spent $800 last week repairing your car now a new problem is occurring and you're trying to decide whether to fix the car or trade it in for a newer model in analyzing the situation the $800 repair expense is a_______ cost
Sunk
Because that has already been paid or liability that has already been incurred is classified as
Sunk cost
________ Should be excluded from the analysis of a capital project
Sunk costs
No matter how many methods of investment analysis you employ
The actual results from a project May vary significantly from the expected results
Do not present value of an investment project increases when ____________, all else constant
The required rate of return decreases
Assume a firm accepts a positive net present value project. An analyst would be most justified in concluding that
The stockholders value in the firm is expected to increase
The process of evaluating affirm using its financial statement to simplify when the firm
Uses the same account and procedures as the other firms in its industry
Which one of the following statements is true
You must know the discount rate to compute the NPV but not the IRR
The internal rate of return is:
computed using a project's cash flows as the only source of inputs.
The internal rate of return tends to be
easier for managers to comprehend than the NPV
