ch 9

When cash flows are conventional, NPV is ____.

-equal to zero when the discount rate equals the IRR -negative for disc rate above IRR -positive for discount rates below the IRR

discounted payback period has which of these weaknesses?

-exclusion of some cash flows -arbitrary cutoff date -loss of simplicity as compared to the payback method

The basic NPV investment rule is:

-reject a project if its NPV is less than zero -accept a project if the NPV is >0 -if the NPV is =0, acceptance or rejection of the project is a matter of indifference

weaknesses of payback method

-time value of money principle are ignored -cash flows received after the payback period are ignored -the cutoff date is arbitrary

true / 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

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

-MRR -NPV

The IRR rule can lead to bad decisions when ___________ or _____________.

-cash flows are not conventional -projects mutually exclusive

3 attributed of NPV are that it:

-discount the cash flows properly -uses cash flows -uses all the cash flows of a project

what is the IRR for a project w an initial investments of 250$ & subsequent cash inflows of 100$ per year for 3 years

9.70%

spreadsheet function for calculating net present value is _____________

NPV( CF1,...,CFn) + CFO

what is the NPV of a project w an initial investment of $95, a cash flow in one year of 107, & disc rate of 6%

NPV: -$95+(107/1.06)=$5.94

payback period tells the time it takes to break even in an _____ sense. Discounted payback period tells the time it takes to breakeven in an ________ or financial sense.

accounting, economic

Capital ____ is the decision-making process for accepting and rejecting projects.

budgeting

which capital budgeting decision method finds the present value of each cash flow b4 calculating a payback period

discounted payback period

true / false: the MIRR function eliminates multiple IRRs & should replace NPV

false

profitability index is calculated by dividing the PV of the _____ cash flows by the initial investments

future

IRR continues to be very popular in practice, partly bc:

gives a rate of return rather than a dollar value

The present value of all cash flows after the intitial investments is is divided by the _____ to calculate the profitability index.

initial investments

by ignoring time value, the payback period rule may accept projects with a ________ ( positive or negative) NPV

negative

the capital budgeting method allows lower management to make smaller, everyday financial decisions effectively.

payback method

the amount of time needed for cash flows from an investment to pay for its initial cost is the

payback period

capital budgeting, the net ______ determines the value of a project to the company

present value

If the IRR is > than the _______ ___________, we should accept the project.

required return

scenario would IRR always recommend the wrong decision?

starting cash flow: 1000 ending cash flow: -2000

The point at which the NPV profile crosses the vertical axis is the:

sum of cash flows of the project

true / false: the crossover rate is the rate at which the NPVs of two projects are equal

true

true/false : IRR approach may lead to incorrect decisions in comparison of two mutually inclusive projects

true

IRR is the discount rate that makes the NPV of a project equal to _________

zero