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