Chp 9 Smartbook Assignment

Fill in the blank question. By ignoring time value, the payback period rule may incorrectly accept projects with a (positive/negative) NPV.

negative

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

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

independent

According to Graham and Harvey's 1999 survey of 392 CFOs, in addition to IRR and NPV, which were the two most widely used techniques, over half of the respondents always, or almost always, used which of the following methods?

Payback method

Fill in the blank question. The AAR is calculated by taking the average net income and dividing it by the average _______ value.

book

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

crossover

A(n) (decrease/increase) in the size of the first cash inflow will decrease the payback period, all else held constant.

increase

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.

mines

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

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

present value

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

required return

The discounted payback is the time it takes to break even in an ________ or financial sense.

Economic

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

Needed information is usually available. Is easy to compute.

The ____________ method differs from NPV because it evaluates a project by determining the time needed to recoup the initial investment.

payback

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

payback

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

budgeting

The 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 spreadsheet function for calculating net present value is ____

NPV()

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

NVP MIRR

Using the payback period rule will bias toward accepting which type of investment?

Short-term investments

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

internal rate of return

The spreadsheet NPV function actually calculates present value, not ______ present value, as the name suggests.

net

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

inflows outflows

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

payback method

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

required return

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

accept

Payback period tells the time it takes to break even in an ____ sense. Discounted payback period tells the time it takes to break even in an ______ or financial sense.

accounting economic

Which capital budgeting decision method finds the present value of each cash flow before calculating a payback period?

Discounted payback period

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

cash flows are not conventional projects are mutually exclusive

Fill in the blank question. The AAR (does/doesn't) incorporate time value of money.

doesn't

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

exclusive

How does the timing and the size of cash flows affect the payback method? Assume the project does pay back within the project's lifetime.

An increase in the size of the first cash inflow will decrease the payback period, all else held constant.

Based on the average ______ return rule, a project is acceptable if its average ________ return exceeds a target average _________ return.

Accounting Accounting Accounting

Which of the following are weaknesses of the payback method?

Time value of money principles are ignored. Cash flows received after the payback period are ignored. The cutoff date is arbitrary.

True or false: IRR approach may lead to incorrect decisions in comparison of two mutually exclusive projects.

True

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

future

Capital Corp is considering a project whose internal rate of return is 14%. If Capital's required return is 14%, the project's NPV is:

0

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

False

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

Starting cash flow: 1000 Ending cash flow: -2000

True or false: Based on the discounted payback rule, an investment is acceptable if its discounted payback is less than some prespecified number of years.

True

The internal rate of return is a function of ____.

a project's cash flows

According to the average accounting return rule, a project is acceptable if its average accounting return exceeds:

a target average accounting return

The basic NPV investment rule is:

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

One of the main disadvantages of the discounted payback period rule is that the cutoff is arbitrarily set and cash flows beyond that point are _____.

ignored

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

not conventional

The three attributes of NPV are that it:

uses cash flows. uses all the cash flows of a project. discounts the cash flows properly.

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.

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

initial investment

Arrange the steps involved in the discounted payback period in order starting with the first step.

1. Discount the cash flows using the discount rate 2. Add the discounted cash flows 3. Accept if the discounted payback period is less than some pre-specified number of years

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

Net ______ value is a measure of how much value is created or added today by undertaking an investment.

Present

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

Sum of the cash flows of the project

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

suggests accepting