Chapter 5: Reading Assignment

-reject a project if NPV is less than zero -accept a project if the NPV is greater than zero -be indifferent towards accepting a project if NPV is equal to zero

According to the basic investment rule for NPV, a firm should ____. Multiple select question.

-accept; less -reject; greater

The decision rule for a project for which the first cash flow is an inflow and subsequent cash flows are negative states that we should ___________ the project when the IRR is ___________ than the discount rate.

a zero NPV

The incremental IRR is the rate that causes the incremental cash flows to have:

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

What is the NPV of a project with an initial investment of $95, a cash flow in one year of $107, and a discount rate of 6 percent?

is unable

The IRR ______ to distinguish between investing or financing.

initial investment

The net present value of a project's cash flows is divided by the ______ to calculate the profitability index.

False

True or false: A firm evaluating two mutually exclusive projects can accept both projects.

True

True or false: The crossover rate is the rate at which the NPVs of two projects are equal.

PI= ((80/1.12)+(20/1.2^2))/30= 2.91

What is the PI for a project with an initial cash outflow of $30 and subsequent cash inflows of $80 in Year 1 and $20 in Year 2 if the discount rate is 12 percent?

not needed

When computing the IRR, the discount rate is:

True

A project that results in the firm receiving funds first and pays out funds later should not be accepted.

$2.73 Reason: CF1= (-$30-(-$10)= -$20) CF2= $70-$45= $25 NPV= -$20+(25/1.10)= $2.73

A small project has cash flows of -$10 and $45, and a large project has cash flows of -$30 and $70. What is the incremental NPV at a discount rate of 10%?

incremental

A way to evaluate mutually exclusive projects is to analyze the ___________ cash flows.

budgeting

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

accept if the IRR is less than R

For a project with a positive initial cash flow followed by negative cash flows, we should ___.