Chapter 9 Smart book 2

The AAR does (does/doesn't) incorporate time value of money.

doesnt

The IRR can lead to the wrong decision when cash outflows (inflows/outflows) occur before cash inflows (inflows/outflows).

inflows,outflows

True or 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

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

true

In which of the following scenarios would IRR always recommend the wrong decision?

Starting cash flow: 1000 Ending cash flow: -2000

A situation in which taking one investment prevents the taking of another is called a mutually _______investment decision.

exclusive

True or false: The MIRR function eliminates multiple IRRs and should replace NPV.

false

The profitability index is calculated by dividing the PV of the _________ cash flows by the initial investment.

future

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

accept

Based on the average______ return rule, a project is acceptable if its average ______return exceeds a target average ______return.

accounting

The _______rate is the rate at which the NPVs of two projects are equal.

crossover

The_______ rate is the rate at which the NPVs of two projects are equal.

crossover

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

NPV MIRR

Which of the following are advantage(s) of AAR?

-easy to compute -needed info is always available

Select all that apply Which of the following are mutually exclusive investments?

A restaurant or a gas station on the same piece of land. Two different choices for the assembly lines that will make the same product.

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

Independent

With nonconventional cash flows, there is a possibility that more than one discount rate will make the NPV of an investment zero. This is called the _________rates of return problem.

Multiple

An independent project ______(does/doesn't) rely on the acceptance or rejection of another project.

doesnt

For a project with conventional cash flows, the NPV is ______ if the required return is less than the IRR, and it is ______ if the required return is greater than the IRR.

positive, negative

The profitability index will be bigger than one for a (negative/positive) NPV investment and less than one for a (negative/positive) NPV investment.

positive, negative

According to the basic IRR rule, we should _____.

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

With nonconventional cash flows, there is a possibility that more than one discount rate will make the NPV of an investment zero. This is called_________ the rates of return problem.

multiple

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

The internal rate of return is a function of ____.

a project's cash flows

The IRR rule can lead to bad decisions when cash flows are _____ or projects are mutually exclusive.

not conventional

Based on the average accounting return rule, a project is acceptable if its_______ average accounting return exceeds a average accounting return.

target/goal

The present value of all cash flows (after the initial investment) is divided by the ______ to calculate the profitability index.

initial investment

The IRR rule can lead to bad decisions when _____ or _____.

cash flows are not conventional projects are mutually exclusive