MGF Chapter 8

if a project has multiple internal rates of rerun, what methods should be used (2)

1) NPV 2) MIRR

which of the following are reasons why IRR continues to be used in practice (3)?

1) business people prefer to talk about rates of rerturn 2) it is easier to communicate information about proposal with an IRR 3) The IRR of a proposal can be calculated without knowing the appropriate discount rate

The basic NPV Investment rule is: (3)

1) if the NPV is equal to zero, acceptance or rejection of the project is matter of indifference 2)reject project if its NPV is less than zero 3) accept a project if the NPV is greater than zero

Which of the following present problems when using the IRR method (2)

1) mutually exclusive projects 2) non-convertional cash flows

which 2 capital budgeting methods are widely used by firms in the US and Canada

1) net present value 2) internal rate of return

In general NPV is (3)

1) postive for discount rates below IRR 2) equal to zero when the discount rate equals IRR 3) negative discount rates above IRR

what are advantages of the payback method for management (3)?

1) the payback period method is ideal for minor projects 2) it allows lower level managers to make small decisions effectively 3) the payback period meth is way to use

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 way ($)?

1) the rage of cash flows is specified in excel being with cashflow #1, not cashflow 0 2)with the excel NPB function, cashflow #0 must be handled outside the NPV function 3) the discount rate in Excel is entered as a decimal, or percentage which a percent sign 4) the excel NPV function is actually a PV function

what 3 methods are used for calculating MIRR of a project

1)Reinvestment approach 2)Discounting approach 3)Combination approach

what are weaknesses of the payback method (3)?

1)time value of money principles are ignored 2)cash flows relied after the payback period are ignored 3)the cuffoff date is arbitrary

the spreadsheet function for calculation net present value is

=NPV (rate, cf1.....,cfn)+ cf0

A project should be ____ if its NPV is greater than zero

Accepted

The profitability index is calculated by dividing the PV of the ____ cash inflows by the initial investment

Future

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

Initial investment

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

Payback

The NPV is _______ if the required return is less than the IRR and it is ______if the required tern is greater than the IRR

Positive, negative

IF the IRR is greater than the ___________ we should accept the project

Required return

internal rate of return IRR must be compared to the ______ in order to determine the acceptability of a project

Required return

(T/F) payback period ignores time value of money

True

according to the aver accounting return rule, a project is acceptable if its average accounting return exceeds

a target average accounting return

one of the weaknesses of the payback period is that the cutoff date is ______ standard

arbitrary

The average accounting return is defined as

average net income/ average book value

capital _______ is the decision making process for accepting and rejecting projects

budgetting

what is a disadvantage of the profitability index?

cannot rank mutually exclusive projects

the profitability index is also called the ______ ratio

cost-benefit

(T/F) an advantage of the ARR is that it is based on book values not market values

false

A __________ project does not rely on the acceptance or rejection of another project

independent

the payback period can lead to foolish decisions if it is used to literally because

it ignores cash flows after the cutoff date

higher cash flows earlier in a projects life are ______ valuable than higher cash flows later on

more

if a firm is evaluating two possible projects, both of which require the use of the same production facilities, these projects would be considered

mutually exclusive

in capital budgeting _________ determines the dollar value of a project to the company

net present value

one of the flaws of the payback period method is that cash flows after the cutoff date are___________

not considered in the analysis

The IRR is the discount rate that makes NPV equal to

zero