Finance Chapter 9 Review

What is the first step in the Net Present Value (NPV) process?

Estimate the future cash flows

According the video, one of the biggest challenges for the Net Present Value method is:

Identifying the appropriate discount rate to use

All of the following are commonly cited reasons for using the Internal Rate of Return, except:

Multiple IRR's allow the company to choose the best one when evaluating projects.

Which one of the following methods predicts the amount by which the value of a firm will change if a project is accepted?

Net present value

What does mutually exclusive mean?

Taking one project means that we cannot take the other.

What are non-conventional cash flows?

A combination of cash outflows and inflows.

Net present value:

is the best method of analyzing mutually exclusive projects.

A project has a discounted payback period that is equal to the required payback period. Given this information, the project:

must have a profitability index that is equal to or greater than 1.0.

Javangula Foods is considering two mutually exclusive projects and has determined that the crossover rate for these projects is 12.3 percent. Given this information, you know that:

the project that is acceptable at a discount rate of 12 percent should be rejected at a discount rate of 13 percent.

A project has a net present value of zero. Given this information:

the project's cash inflows equal its cash outflows in current dollar terms.

The Internal Rate of Return (IRR) represents which of the following:

The discount rate that makes the net present value equal to zero

When choosing between mutually exclusive projects, what is the best method to use?

The highest NPV is always the best option.

You are comparing two mutually exclusive projects, Project X and Project Z. The crossover point is 11.4 percent. You have determined that you should accept project X if the required return is 12.7 percent. This implies you should:

always accept Project X if the required return exceeds the crossover rate.

The IRR that causes the net present value of the differences between two project's cash flows to equal zero is called the:

crossover rate.

The internal rate of return is defined as the:

discount rate which causes the net present value of a project to equal zero.