Chapter 8
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. It is easier to communicate information about a proposal with an IRR. Businesspeople prefer to talk about rates of return.
What are the advantages of the payback period method for management?
The payback period method is easy to use. The payback period method is ideal for minor projects. It allows lower-level managers to make small decisions effectively.
Based on the average accounting return rule, a project is Blank______ if its average accounting return exceeds a target average accounting return.
acceptable
A project should be Blank______ if its NPV is greater than zero.
accepted
The payback period rule Blank______ a project if it has a payback period that is less than or equal to a particular cutoff date.
accepts
In general, NPV is
equal to zero when the discount rate equals the IRR negative for discount rates above the IRR positive for discount rates below the IRR
True or false: The profitability index (PI) is calculated by dividing the present value of an investment's future cash flows by its future cost.
false Reason: The profitability index (PI) is calculated by dividing the present value of an investment's future cash flows by its initial cost.
The profitability index is calculated by dividing the PV of the Blank______ cash inflows by the initial investment.
future
The basic NPV investment rule is:
if the NPV is equal to zero, acceptance or rejection of the project is a matter of indifference. reject a project if its NPV is less than zero. accept a project if the NPV is greater than zero.
A(n) Blank______ project does not rely on the acceptance or rejection of another project.
independent
The profitability index (PI) is calculated by dividing the present value of an investment's future cash flows by its
initial cost
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, and taking one project means that we cannot take the other, these projects would be considered
mutually exclusive
Which of the following present problems when using the IRR method?
nonconventional cash flows mutually exclusive projects
______ method evaluates a project by determining the time needed to recoup the initial investment.
payback
The NPV is Blank______ if the required return is less than the IRR, and it is Blank______ if the required return is greater than the IRR.
positive; negative
Which of the following is a disadvantage of the payback period rule?
requires an arbitrary cutoff point
Which of the following are methods of calculating the MIRR of a project?
the combination approach the reinvestment approach the discounting approach
The IRR is the discount rate that makes NPV equal to
zero
______ is a measure of how much value is created or added by undertaking an investment.
Net present value / npv
The spreadsheet function for calculating net present value is
=NPV(rate,CF1, ..., CFn) + CF0
True or false: The IRR is easy to use because you only need to know the appropriate discount rate.
False
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 range of cash flows specified in Excel begins with Cashflow 1, not Cashflow 0. The discount rate in Excel is entered as a decimal, or as a percentage with a percent sign. With the Excel NPV function, Cashflow 0 must be handled outside the NPV function. The Excel NPV function is actually a PV function.
Which of the following are weaknesses of the payback method?
Time value of money principles is ignored. Cash flows received after the payback period are ignored. The cutoff date is arbitrary.
True or false: A project with nonconventional cash flows will produce two or more IRRs.
True Reason: An IRR will result for every change in sign in the cash flow stream.
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 United States and Canada.
Truecorrect
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.
Truecorrect
The combination MIRR method is used by the Excel MIRR function and uses which of the following?
a reinvestment rate for compounding discounting all cash outflows to time 0 compounding cash inflows to the end of the project a financing rate for discounting
According to the average accounting return rule, a project is acceptable if its average accounting return exceeds:
a target average accounting return.