Fin ch 9

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

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

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

required return

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

doesn't

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

Capital

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

Payback method

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

economic

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

net

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

present

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

false

The payback period can lead to incorrect decisions if it is used too literally because it ____. Multiple choice question.

ignores cash flows after the cutoff date

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

inflows, outflows

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

negative

According to the basic IRR rule, we should _____.

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

Which of the following are weaknesses of the payback method?

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

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

future

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

inflows outflows

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

initial investment

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

accepted

The spreadsheet function for calculating net present value is ____.

=NPV()

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

independent

NPV ______ cash flows properly.

discounts

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

budgeting

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

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

True

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

economic

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

not considered in the analysis

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

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

present value

Opportunity costs are classified as:

relevant costs

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

crossover

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

projects are mutually exclusive cash flows are not conventional

The basic NPV investment rule is:

reject a project if its NPV is less than zero. 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

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

accept

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

exclusive

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

MIRR NPV

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

Discounted payback period

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

The internal rate of return is a function of ____.

a project's cash flows

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

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

crossover

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

discount the cash flow using the discount rate add discounted cash flows accept if the discounted payback period is less than some prespecified number of years

Based on the _______ payback rule, an investment is acceptable if it's ________ payback is less than some prespecified number of years.

discounted, discounted

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

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

required return

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

exclusive

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

exclusive

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

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

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

Short-term investment

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

Starting cash flow: 1000 Ending cash flow: -2000

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

smaller

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.