FINC311 CH8 Homework Notes

accepted

A project should be __________ if its NPV is greater than zero.

independent

A(n) ______ project does not rely on the acceptance or rejection of another project.

-Net Present Value -Internal Rate of Return

According to Graham and Harvey's 1999 survey of 392 CFOs (published in 2001), which of the following two capital budgeting methods are widely used by firms in the US and Canada?

True

According to Graham and Harvey's 1999 survey of 392 CFOs (published in 2001), which of the following two capital budgeting methods are widely used by firms in the US and Canada?

reject a project if the IRR is less than the required return

According to the basic IRR rule, we should:

Mutually Exclusive

If a firm is evaluating two possible projects, both of which require the use of the same production facilities, and taking one project means that we cannot take the other, these projects would be considered _______________.

-MIRR -NPV

If a project has multiple internal rates of return, which of the following methods should be used?

required return

If the IRR is greater than the _______ ________, we should accept the project.

net present value

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

required return

Internal rate of return (IRR) must be compared to the ________ in order to determine the acceptability of a project.

not considered in the analysis

One of the flaws of the payback period method is that cash flows after the cutoff date are ___.

arbitrary

One of the weaknesses of the payback period is that the cutoff date is a(n) ______ standard.

- the discount rate in Excel is entered is decimal, or as a percentage with a percent sign - the range of cash flows specified in Excel begins with cashflow #1, not cashflow 0 - with the Excel NPV function, Cashflow #0 must be handled outside the NPV function - the Excel NPV function is actually a PV function

Specifying variables in the Excel NPV function differs from the manner in which they are entered in a financial calculator in which of the following ways?

* compounding cash inflows to the end of the project * a reinvestment rate for compounding * discounting all cash outflows to time 0 * a financing rate for discounting

The Combination MIRR method is used by the Excel MIRR function and uses which of the following?

* compounding cash inflows to the end of the project * a reinvestment rate for compounding * discounting all negative cash outflows to time 0 * a financing rate for discounting

The Combination MIRR method is used by the Excel MIRR function and uses which of the following?

positive, negative

The NPV is ______ if the required return is less than the IRR, and it is ______ if the required return is greater than the IRR.

accept

The PI rule for an independent project is to ______ the project if the PI is greater than 1.

cost-benefit

The Profitability Index is also called the __________ ratio.

payback

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

payback period; NPV

The __________ is best suited for decisions on relatively small, minor projects while ______ is more appropriate for large complex projects.

-accept a project if the NPV is greater than zero -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

The basic NPV investment rule is:

more

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

more

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

a project's cash flows

The internal rate of return is a function of ____.

zero

The multiple rates of return problem is the possibility that more than one discount rate may make the net present value of an investment equal to ___.

0

The multiple rates of return problem is the possibility that more than one discount rate may make the net present value of an investment equal to _________.

it ignores cash flows after the cutoff date

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

accepts

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

initial investment

The present value of the future cash inflows are divided by the ______ to calculate the profitability index.

initial cost

The profitability index (PI) is calculated by dividing the present value of an investment's future cash flows by its _____ _____.

Fasle

True or false: The payback period takes into consideration the time value of money.

False

True or false: The profitability index (PI) is calculated by dividing the present value of an investment's future cash flows by its future cost.

false

True or false: The profitability index rule for an independent project states that, if a project has a positive NPV, then the present value of the future cash flows must be smaller than the initial investment.

False

True or false: There is only one way to calculate the modified IRR.

True

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.

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

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

how long it takes to recover the initial investment

What is the primary concern of the payback period rule?

the discount

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

-The Reinvestment Approach-The Combination Approach-The Discounting Approach

Which of the following are methods of calculating the MIRR of a project?

-It is easier to communicate information about a proposal with an IRR -The IRR of a proposal can be calculated without knowing the appropriate discount rate -Businesspeople refer to talk about rates of return

Which of the following are reasons why IRR continues to be used in practice?

It cannot rank mutually exclusive projects.

Which of the following is a disadvantage of the Profitability Index?

requires an arbitrary cutoff point

Which of the following is a disadvantage of the payback period rule?

-Mutually exclusive projects -Non-conventional cash flows

Which of the following present problems when using the IRR method?

Net Present Value

_______ is a measure of how much value is created or added by undertaking an investment.

=NPV(rate,CF1, ..., CFn) + CF0

The spreadsheet function for calculating net present value is ______.

True

True or false: A project with non-conventional cash flows will produce two or more IRRs.

True

True or false: According to Graham and Harvey's 1999 survey of 392 CFOs (published in 2001), the internal rate of return and the NPV are the two most popular capital budgeting methods used by firms in the US and Canada.

True

True or false: Some projects, such as mines, have cash outflows followed by cash inflows and cash outflows again, giving the project multiple internal rates of return.

False

True or false: The IRR is easy to use because you only need to know the appropriate discount rate.

False

True or false: The PI always results in the correct decision in comparisons of mutually exclusive investments.

False

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.