FIN 311 CH 9 Exam 3

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

smaller

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

Short-term investment

Which of the following are mutually exclusive investments?

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

The internal rate of return is a function of ____.

a project's cash flows

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

accepted

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

exclusive

The MIRR function eliminates multiple IRRs and should replace NPV.

false

The basic NPV investment rule is:

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. accept a project if the NPV is greater than zero.

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

initial investment

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

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

not considered in the analysis

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

not conventional

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

payback method

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

Opportunity costs are classified as:

relevant costs

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

zero

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

PV

The three attributes of NPV are that it:

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

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 prespecified number of years.

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

Discounted payback period

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

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

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

MIRR NPV

NPV ______ cash flows properly.

discounts

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

Net present value

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

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

payback

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

future

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

negative

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

projects are mutually exclusive cash flows are not conventional

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

budgeting

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

crossover