Chapter 13 Finance

DPB

Discounted Payback

which of these are weaknesses of the PB method of analysis? Select all

Ignores cash flows after the payback period. Can cause incorrect decisions when projects are mutually exclusive. Ignores the time value of money.

PI

Profitability Index

What unit of measurement does PI use?

Rate, benchmark 1

Which unit of measurement does IRR use?

Rate, benchmark Cost of Capital

What unit of measurement does MIRR use?

Rate, benchmark cost of capital

in particular, although rate-based decision statistics tell us the rate of _________________ invested, they don't reflect the __________ of the investment on which that return is based.

Return per dollar-------Ammount

The PB method id based on which one of these assumptions?

Th e cash flows occur evenly throughout each time period

Which assumption is made by the payback statistic method?

The cash flows are normal

which of these is a weakness of the payback method? Select all that apply

The present value of the inflows are ignored. All cash flows after the payback period are ignored.

Which unit of measurement does DPB use?

Time, benchmark varies

Which unit of measurement does PB technique use?

Time, benchmark varies

Which one of these factors affects the capital budgeting techniquw used to analyze a project?

Wether or not the time value of money is to be considered.

IRR

internal Rate of Return

When to accept or reject PB method

Accept project if PB ≤ Maximum allowable PB Reject project if PB > Maximum allowable PB

How are normal cash flows defined?

All cash flows occur at the beginning.

Which of these steps are required when deciding wether or not an independent project should be accepted?

Compute the statistic, compare the statistic to the benchmark.

Which unit of measurement does NPV use?

Dollars, Benchmark $0

Rate based decision statistics provide a rate of return based on which of these?

Each $1 of investment

Which of these apply to payback method? select all

Easy to compute. Considers the total dollar cost of the initial investment.

What type of return are firms seeking when considering a real asset project?

Economic Profit

MIRR

Modified internal Rate of Return

Which one of these capital budgeting techniques is preferred for most projects?

NPV

NPV

Net Present Value

What does the term "mutually exclusive projects" imply?

Only one of the two projects can be accepted.

Capital budgeting techniques that use time as their unit of measurement:

PB (Payback DPB (Discounted Payback)

Which one of these methods best applies to a project when a firm is facing a time constraint?

PB (Payback)

a project has an initial cost of $900 and cash flows of $500, %800 and $200 over years 1 to 3, respectively. How is the payback period calculated?

PB = 1 +($900)-$500)/$800

A project has been assigned a maximum allowable payback period of 2.5 years. How is the reject decision expressed for this project?

PB> 2.5 years

If a firm is concerned about capital constraints and needs to prioritize its projects, which budgeting technique should the firm use?

PI (Profitability Index)

Rate is the unit of measurement for which of these capital budgeting techniques? select all that apply:

PI, IRR, and MIRR

PB

Pay Back