Chapter 13

Which rate-based decision statistic measures the excess return (the amount above and beyond the cost of capital for a project), rather than the gross return?

Profitability Index, PI

Neither payback period nor discounted payback period techniques for evaluating capital projects account for

cash flows that occur after payback.

The Net Present Value decision technique uses a statistic denominated in

currency.

This technique for evaluating capital projects tells how long it will take a firm to earn back the money invested in a project plus interest at market rates.

discounted payback

All capital budgeting techniques

exclude some crucial information.

A capital budgeting technique that generates decision rules and associated metrics for choosing projects based upon the implicit expected geometric average of a project's rate of return.

internal rate of return

A capital budgeting technique that converts a project's cash flows using a more consistent reinvestment rate prior to applying the Internal Rate of Return, IRR, decision rule.

modified internal rate of return

These are groups or pairs of projects where you can accept one but not all.

mutually exclusive

A capital budgeting technique that generates a decision rule and associated metric for choosing projects based on the total discounted value of their cash flows.

net present value

A graph of a project's ______ is a function of cost of capital.

net present value

Of the capital budgeting techniques discussed, which works equally well with normal and non-normal cash flows and with independent and mutually exclusive projects?

net present value

These are sets of cash flows where all the initial cash flows are negative and all the subsequent ones are either zero or positive.

normal cash flows

This technique for evaluating capital projects is particularly useful when firms face time constraints in repaying investors.

payback

This technique for evaluating capital projects tells how long it will take a firm to earn back the money invested in a project.

payback

When choosing between two mutually exclusive projects using the payback period method for evaluating capital projects, one would choose

the project that pays back the soonest if it is equal to or less than managers' maximum payback period.

The Net Present Value decision technique may not be the only pertinent unit of measure if the firm is facing

time or resource constraints.

The benchmark for the Profitability Index, PI, is the

zero or anything larger than zero