finance ch.8

According to the average accounting return rule, a project is acceptable if its average accounting return exceeds:

a target average accounting return.

Capital budgeting is probably the most important of the three key areas of concern to the financial manager because Blank______.

a. It defined the business of the firm

1) A project should be Blank______ if its NPV is greater than zero.

accepted

The payback period rule Blank______ a project if it has a payback period that is less than or equal to a particular cutoff date.

accepts: The payback period rule accepts a project if it has a payback period that is less than or equal to a particular cutoff period.

1) Capital Blank______ is the decision-making process for accepting and rejecting projects.

budgeting

1) True or false: The discounted cash flow (DCF) valuation estimates future value as the difference between the market price and the cost of the investment.

false: a. The discounted (DCF) valuation estimates the NPV as the difference between the present value of the future cash flows and the cost of the investment.

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

it ignores cash flows after the cutoff date.

The discounted cash flow valuation shows that higher cash flows earlier in a project's life are Blank______ valuable than higher cash flows later on.

more

1) ______ is a measure of how much value is created or added by undertaking an investment.

net present value

In capital budgeting, Blank______ determines the dollar value of a project to the company.

net present value

The basic NPV investment rule is:

reject a project if its NPV is less than zero. if the NPV is equal to zero, acceptance or rejection of the project is a matter of indifference. accept a project if the NPV is greater than zero.

1) When calculating NPV, the present value of the nth cash flow is found by dividing the nth cash flow by 1 plus Blank______ rate raised to the nth power.

the discount

True or false: When calculating NPV, the present value of the nth cash flow is found by dividing the nth cash flow by 1 plus the discount rate raised to the nth power.

true: When calculating NPV, the present value of the nth cash flow is found by dividing the nth cash flow by 1 plus the discount rate raised to the nth power.

How does the timing and the size of cash flows affect the payback method? Assume the project does pay back within the project's lifetime. Multiple choice question.

An increase in the size of the first cash inflow will decrease the payback period, all else held constant.

Which of the following are weaknesses of the payback method?

Cash flows received after the payback period are ignored. Time value of money principles is ignored. The cutoff date is arbitrary.

What is the primary concern of the payback period rule?

How long it takes to recover the initial investment

What are the advantages of the payback period method for management?

It allows lower-level managers to make small decisions effectively. The payback period method is easy to use. The payback period method is ideal for minor projects.

The Blank______ method evaluates a project by determining the time needed to recoup the initial investment.

payback

The Blank______ is best suited for decisions on relatively small, minor projects, while Blank______ is more appropriate for large, complex projects. Multiple choice question.

payback period; NPV