Business Finance Chapter 8
What is the profitability index for a project with an initial cash outflow of #30 and subsequent cash inflows of $80 in year one and $20 in year two of the discount rate is 12%?
2.91
The profitability index calculated by dividing the PV of the ______ cash inflows by the initial investment
Future
Which of the following are weaknesses of the payback method?
The cutoff date is arbitrary. The time value of money principles are ignored. Cash flows received after the payback period are ignored.
A(n) _______ 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
The ______ is best suited for decisions on relatively small, minor projects while _____ is more appropriate for large complex projects.
payback period; NPV
The IRR is the discount rate that makes NPV equal to _______.
zero
The spreadsheet function for calculating net present value is:
= NPV (rates, CF1,..., CFn) + CF0
__________ is a measure of how much value is created or added by undertaking an investment.
Net Present Value
Which of the following are reasons why IRR continues to be used in practice?
The IRR of a proposal can be calculated without knowing the appropriate discount rate. Businesspeople prefer to talk about rates of return. It is easier to communicate information about a proposal with an IRR.
A project should be __________ if its NPV is greater than zero.
accepted
One of the weaknesses of the payback period is that the cutoff dates is a(n) _____ standard.
arbitary
The Average Accounting Return is defined as:
average net income/average book value
The present value of the future cash inflows are divided by the ______ to calculate the profitability index.
initial investment
Higher cash flows earlier in a project's life are ____ valuable than higher cash flows on.
more
In capital budgeting, _________ determines the dollar value of a project to the company.
net present value
Which of the following present problems when using the IRR method?
non-conventional cash; mutually exclusive projects
In general, NPV is ____.
positive for discount rates below the IRR. equal to zero when the discount rate equals the IRR. negative for discount rates above the IRR.
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
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
When calculating NVP, 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
What is the IRR for a project with an initial investment of $500 and subequent cash inflows of $145 per year for 5 years.
13.82%
The PI rule for an independent project is to _____ the project if the PI is greater than 1.
accept
The payback period rule ______ a project if it has payback period that is less than or equal to a particular cutoff date.
accepts
The Profitability Index is also called the _______ ratio.
cost-benefit
Which of the following are methods of calculating the MIRR of a project?
The Reinvestment Approach. The Combination Approach. The Discounting Approach.
The NPV is _______ if the required to return is less than the IRR, and it is _______ if the required return is greater than the IRR.
positive, negative
According the 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?
internal rate of return, net present value
If a project has multiple internal rates of return, which of the following methods should be used?
NPV, MIRR
Which of the following is a disadvantage of the Profitability index?
Cannot rant mutually exclusive projects
The Combination of MIRR method is used by the Excel MIRR function and uses which of the following?
Discounting all negative cash flows to time 0. A reinvestment rate for compounding. A financing rate for discounting. Compounding cash inflows to the end of the project.
What are the advantages of the payback period method for management?
It allows lower level managers in make small decisions effectively. The payback period method is easy to use. The payback period method is ideal for minor projects.
The payback period can lead to foolish decisions if it is used to literally because:
It ignores cash flows after the cutoff dates
What is the NPV of a project with an initial investment of $95, a cash flow in one year of $107, and a discount rate of 6 percent?
NPV = $95 + ($107/1.06) = $5.94
Specifying variables in the Excel NPV function differs from the manner in which they are entered in a financial calculator in which of the following ways?
The discount rate in Excel is entered is decimal. The range of cash flows specified in Excel begins with cashflow #1, not cashflow 0. With the Excel NPV function, Cashflow #0 must be handled outside the NPV-function. The Excel NPV function is actually a PV function.
