Net Present Value and Other Investment Criteria - Chapter 8
Which of the following are reasons why IRR continues to be used in practice?
1. The IRR of a proposal can be calculated without knowing the appropriae discount rate. 2. It is easier to communicate information about a proposal with an IRR. 3. Businesspeople prefer to talk about rates of return.
When cash flows are conventional, NPV is ____.
1. equal to zero when the discount rate equals the IRR 2. negative for discount rate above IRR 3. positive for discount rate below the IRR
Which of the following is a disadvantage of the Profitability Index?
Cannot rank mutually exclusive projects.
If a project has multiple internal rates of return, which of the following methods should be used?
NPV and MIRR
The PI rule for an independent project is to ____ the project if the PI is greater than 1.
accept
A project should be ____ if its NPV is greater than zero.
accepted
One of the weaknesses of the payback period is that the cutoff date is ____ standard.
an arbitrary
The Average Accounting Return is defined as
average net income/average book value
Capital ____ is the decision-making process for accepting and rejecting projects.
budgeting
The Profitability Index is also called the _____ ratio.
cost-benefit
An ____ project does not rely on the acceptance or rejection of another project.
independent
Capital budgeting is probably the most important of the three key areas of concern to the financial manager because ____.
it defines the business of the firm
If a firm is evaluating two possible projects, both of which require the use of the same production facilities, these projects would be considered ____.
mutually exclusive
In capital budgeting, ___ determines the dollar value of a project to the company.
net present value
The ____ method evaluates a project by determining the time needed to recoup the initial investment.
payback
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
A project with non-conventional cash flows will produce two or more IRRs. True or False?
true
The Combination MIRR method is used by the Excel MIRR function and uses which of the following?
* compounding cash inflows to the end of the project * a reinvestment rate for compounding * discounting all negative cash flows to time 0 * a financing rate for discounting
Which of the following are methods of calculating the MIRR of a project?
- the reinvestment approach - the discounting approach - the combination approach
According to Graham and Harvey's 1999 survey of 392 CFSs (published in 2001), which of the following two capital budgeting methods are widely used by firms in the US and Canada?
- net present value - internal rate of return
Which of the following are weaknesses of the payback method?
- the cutoff date is arbitrary - time value of money principles are ignored - cash flows received after the payback period are ignored
The spreadsheet function for calculating net present value is:
=NPV(CF1,..., CFn) + CF0
The payback period can lead to foolish decisions if it is used too literally because
it ignores cash flows after the cutoff date
Which of the following present problems when using the IRR method?
- non-convential cash flows - mutually exclusive projects
What are the advantages of the payback period method for management?
1. the payback period method is easy to use 2. it allows lower level managers to make small decisions effectively 3. the payback period method is ideal for short projects
Higher cash flows earlier in a project's life are ____ valuable than higher cash flows later on.
more
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
