Week 6

Which of the following are weaknesses of the payback method? Cash flows received after the payback period are ignored. All cash flows are included in the payback period. Time value of money principles are ignored. The cutoff date is arbitrary.

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

_______ is a measure of how much value is created or added by undertaking an investment. Net Present Value An investment's social value Net Future Value An investment's market value

Net Present Value

Which of the following are methods of calculating the MIRR of a project? The Reinvestment Approach The Present Value Approach The Combination Approach The Discounting Approach

The Reinvestment Approach The Combination Approach The Discounting Approach

One of the weaknesses of the payback period is that the cutoff date is a(n) ______ standard. arbitrary industry market perfect

arbitrary

Capital ______ is the decision-making process for accepting and rejecting projects. spending relevance budgeting structure

budgeting

The Profitability Index is also called the __________ ratio.

cost-benefit

The ______ method evaluates a project by determining the time needed to recoup the initial investment.

payback

When calculating NPV, the present value of the nth cash flow is found by dividing the nth cash flow by 1 plus ______ rate raised to the nth power.

the discount

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 Discounting ALL cash inflows to time 0 A reinvestment rate for compounding A financing rate for discounting Discounting all cash outflows to time 0 Compounding ALL cash flows to the end of the project A single discount rate for both discounting and compounding

Compounding cash inflows to the end of the project A reinvestment rate for compounding A financing rate for discounting Discounting all cash outflows to time 0

True or false: The payback period takes into consideration the time value of money.

False

According to the average accounting return rule, a project is acceptable if its average accounting return exceeds: a target average accounting return the required rate of return the internal rate of return the net present value

a target average accounting return

Based on the average accounting return rule, a project is _____ if its average accounting return exceeds a target average accounting return.

acceptable

The payback period rule ______ a project if it has a payback period that is less than or equal to a particular cutoff date.

accepts

The payback period rule ______ a project if it has a payback period that is less than or equal to a particular cutoff date. rejects accepts

accepts

In general, NPV is ___. negative for discount rates above the IRR positive for discount rates above the IRR positive for discount rates below the IRR equal to zero when the discount rate equals the IRR

negative for discount rates above the IRR positive for discount rates below the IRR equal to zero when the discount rate equals the IRR

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

net present value

According to Graham and Harvey's 1999 survey of 392 CFOs (published in 2001), which of the following two capital budgeting methods are widely used by firms in the US and Canada? accounting rate of return net present value payback method profitability index internal rate of return

net present value internal rate of return

Which of the following present problems when using the IRR method? non-conventional cash flows a high discount rate mutually exclusive projects larger cash flows later in the project

non-conventional cash flows mutually exclusive projects

True or false: The IRR is easy to use because you only need to know the appropriate discount rate.

False

Which of the following is a disadvantage of the payback period rule? Biased toward liquidity Requires an arbitrary cutoff point Adjusts for uncertainty of later cash flows Easy to understand

Requires an arbitrary cutoff point

What are the advantages of the payback period method for management? It allows lower level managers to make small decisions effectively. The payback period adjusts for the discount rate. The payback period method is ideal for minor projects. 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 minor projects. The payback period method is easy to use.

The __________ is best suited for decisions on relatively small, minor projects while ______ is more appropriate for large complex projects. IRR; NPV payback period; NPV payback period; URL

payback period; NPV

True or false: A project with non-conventional cash flows will produce two or more IRRs.

True

Capital budgeting is probably the most important of the three key areas of concern to the financial manager because _________. its the most difficult it defines the business of the firm its the least understood its the most controversial

it defines the business of the firm

True or false: When calculating NPV, the present value of the nth cash flow is found by dividing the nth cash flow by 1 plus the discount rate raised to the nth power.

true

True or false: According to Graham and Harvey's 1999 survey of 392 CFOs (published in 2001), the internal rate of return and the NPV are the two most popular capital budgeting methods used by firms in the US and Canada.

true

Which of the following are reasons why IRR continues to be used in practice? Businesspeople prefer to talk about rates of return. The IRR of a proposal can be calculated without knowing the appropriate discount rate. The IRR allows the correct ranking of projects. It is easier to communicate information about a proposal with an IRR.

Businesspeople prefer to talk about rates of return. The IRR of a proposal can be calculated without knowing the appropriate discount rate. It is easier to communicate information about a proposal with an IRR.

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

future

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