Finance Ch. 5

The payback period rule ____ a project if it has a payback period that is less than or equal to a particular cuttoff date?

Accepts

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

Budgeting

The payback period method allows upper management to evaluate the ____ abilities of lower management?

Decision making

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

Discounted payback period

Accept a project if its NPV is ___ than zero?

Greater

The dollar difference in value between mutually exclusive projects can be found by calculating the ____ of the incremental cash flows?

NPV

The difference between the present value of an investment's future cash flows and its initial cost is the:

Net Present Value

A project with a cash outflow followed by three cash inflows will always have ___ internal rate of return?

One

The ___ method is best suited for decisions on small projects while the _____ method is most appropriate for large, complex projects?

Payback; NPV

Any type of project should be accepted if the NPV is ______and rejected if it is _____.

Positive; negative

In capital bugeting, the net ____ is the value of a project to a company?

Present Value

The payback method of analysis has a ___ bias?

Timing

The IRR is the discount rate that makes the NPV of a project equal to ___?

Zero

The internal rate of return is a function of?

a project's cash flows

One characteristic of the payback method of project analysis is the:

bias towards liquidity.

A project will have more than one IRR if, and only if, the:

cash flow pattern exhibits more than one sign change.

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

independent

The discount rate that makes the net present value of an investment exactly equal to zero is called the:

internal rate of return

You are trying to determine whether to accept Project A or Project B. These projects are mutually exclusive. As part of your analysis, you should compute the incremental IRR by determining the:

internal rate of return for the differences in the cash flows of the two projects.

An investment is acceptable if the payback period:

is less than some pre-specified period of time

The discounted payback rule states that you should accept an investment project if its discounted payback period:

is less than some pre-specified period of time

If a firm is more concerned about the quick return of its initial investment than it is about the amount of value created, then the firm is most apt to evaluate a capital project using the _____ method of analysis.

payback

The length of time required for an investment to generate cash flows sufficient to recover the initial cost of the investment is called the:

payback period

The internal rate of return for a project will increase if:

the initial cost of the project can be reduced.

All else constant, the net present value of a typical investment project increases when:

the rate of return decreases

Discount rate is determined by the _____ of a project?

Risk

The discounted payback period of a project will decrease whenever the:

amount of each project cash inflow is increased.

All else equal, the payback period for a project will decrease whenever the:

cash inflows are moved earlier in time.

The length of time required for a project's discounted cash flows to equal the initial cost of the project is called the:

discounted payback period

The two fatal flaws of the internal rate of return decision rule are the:

failure to correctly analyze mutually exclusive investment projects and the multiple rate of return problem.

For investment projects, the internal rate of return (IRR):

is the rate generated solely by the cash flows of the investment.

A financing project is acceptable if its IRR is:

less than the discount rate

The possibility that more than one discount rate will make the NPV of an investment equal to zero presents the problem referred to as:

multiple rates of return.

A situation in which accepting one investment prevents the acceptance of another investment is called the:

mutually exclusive investment decision

The primary reason that company projects with positive net present values are considered acceptable is that?

they create value for the owners of the firm