FIN 201 Chapter 9 Assignment

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

- projects are mutually exclusive - cash flows are not conventional

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

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

true

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

accept

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

doesn't

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

false

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

independent

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

present value

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

future

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

present

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

Capital

The IRR is the discount rate that makes the NPV of a project equal to ______.

zero

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

- MIRR - NPV

What are the advantages of the payback period method for management?

- The payback period method is easy to use. - It allows lower level managers to make small decisions effectively. - The payback period method is ideal for short projects.

True or false: Opportunity costs can be ignored when determining the financial feasibility of a project.

False

Which of the following is an example of an opportunity cost?

Rental income likely to be lost by using a vacant building for an upcoming project

One of the flaws of the payback period method is that cash flows after the cutoff date are ___.

not considered in the analysis

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

negative

The three attributes of NPV are that it:

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

The spreadsheet function for calculating net present value is ____.

=NPV()

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

Payback method

A project should be __________ if its NPV is greater than zero.

accepted

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

crossover

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

inflows, outflows

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

not conventional

NPV ______ cash flows properly.

discounts

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

exclusive

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

net

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 basic NPV investment rule is:

- accept a project if the NPV is greater than zero. - if the NPV is equal to zero, acceptance or rejection of the project is a matter of indifference - reject a project if its NPV is less than zero.

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

budgeting

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

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

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

Short-term investment

The payback period method allows lower management to make (smaller/larger), everyday financial decisions effectively.

smaller

Using your personal savings to invest in your business is considered to have an because you are giving up the use of these funds for other investments or uses, such as a vacation or paying off a debt.

Opportunity, cost

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

Starting cash flow: 1000 Ending cash flow: -2000

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, negaitve

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