Chapter 8 Net Present Value

The profitability index (PI) rule for an independent project is to Blank______ the project if the PI is greater than 1. Multiple choice question. accept delay reject

Accept

The discounted cash flow valuation shows that higher cash flows earlier in a project's life are Blank______ valuable than higher cash flows later on. Multiple choice question. more less

More

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 Blank______. Multiple choice question. independent interdependent co-dependent mutually exclusive

Mutually Exclusive

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 payback period rule? Multiple choice question. adjusts for uncertainty of later cash flows requires an arbitrary cutoff point biased toward liquidity easy to understand

requires an arbitrary cutoff point

Which of the following is a disadvantage of the payback period rule? Multiple choice question. adjusts for uncertainty of later cash flows biased toward liquidity requires an arbitrary cutoff point easy to understand

requires an arbitrary cutoff point easy to understand

Which of the following are methods of calculating the MIRR of a project? Multiple select question. the combination approach the reinvestment approach the discounting approach the present value approach

the combination approach the reinvestment approach the discounting approach

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

a target average accounting return.

Based on the average accounting return rule, a project is Blank______ if its average accounting return exceeds a target average accounting return. Multiple choice question. acceptable blue-chip break-even rejected

acceptable

The average accounting return is defined as: Multiple choice question. average book value/average net income. average book value/initial project cost. average net income/initial project cost. average net income/average book value.

average net income/average book value

A project should be Blank______ if its NPV is greater than zero. Multiple choice question. accepted delayed rejected

Accepted

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 false question.TrueFalse

True

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 United States and Canada? Multiple select question. payback method internal rate of return net present value profitability index accounting rate of return

internal rate of return net present value

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

False

True or false: The PI always results in correct decisions in comparisons of mutually exclusive investments. True false question.TrueFalse

False

True or false: The discounted cash flow (DCF) valuation estimates future value as the difference between the market price and the cost of the investment. True false question.TrueFalse

False

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

False

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. True false question.TrueFalse

False

True or false: The profitability index rule for an independent project states that, if a project has a positive NPV, then the present value of the future cash flows must be smaller than the initial investment. True false question.TrueFalse

False

True or false: There is only one way to calculate the modified IRR.

False

The profitability index is calculated by dividing the PV of the Blank______ cash inflows by the initial investment. Multiple choice question. positive previous future

Future

What is the primary concern of the payback period rule? Multiple choice question. How long until the loan on your investment comes due? How long it takes to recover the initial investment Whether the bank requires a higher interest rate than the market? Whether you deserve to get your money back?

How long it takes to recover the initial investment

A(n) Blank______ project does not rely on the acceptance or rejection of another project. Multiple choice question. independent mutually exclusive dependent co-dependent

Independent

The profitability index (PI) is calculated by dividing the present value of an investment's future cash flows by its Blank______. Multiple choice question. initial cost discount rate interest rate coupon rate

Initial Cost

The present value of the future cash inflows are divided by the Blank______ to calculate the profitability index. Multiple choice question. internal rate of return net present value discount rate initial investment

Initial Investment

Which of the following is a disadvantage of the profitability index? Multiple choice question. It is closely related to NPV. It is easy to understand. It is useful when capital is rationed. It cannot rank mutually exclusive projects.

It cannot rank mutually exclusive projects.

Capital budgeting is probably the most important of the three key areas of concern to the financial manager because Blank______. Multiple choice question. it defines the business of the firm it's the least understood it's the most difficult it's the most controversial

It defines the business of the firm

In capital budgeting, Blank______ determines the dollar value of a project to the company. Multiple choice question. net future value net present value the CEO net income

Net Present Value

______ is a measure of how much value is created or added by undertaking an investment. Multiple choice question. Net present value An investment's market value An investment's social value Net future value

Net Present Value

The Blank______ method evaluates a project by determining the time needed to recoup the initial investment. Multiple choice question. payback internal rate of return accounting rate of return

Payback

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

Accepts

The IRR is the discount rate that makes NPV equal to Blank______. Multiple choice question. zero the terminal book value of the project's fixed assets the payback period $42

Zero

The profitability index is also called the Blank______ ratio. Multiple choice question. benefit-cost cost-investment cost-cashflow investment-benefit

Benefit cost

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? Multiple select question. 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. There are no significant differences between variable entry in Excel and in a financial calculator.

-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.

The combination MIRR method is used by the Excel MIRR function and uses which of the following? Multiple select question. discounting ALL cash inflows to time 0 compounding cash inflows to the end of the project a financing rate for discounting a reinvestment rate for compounding discounting all cash outflows to time 0 a single discount rate for both discounting and compounding compounding ALL cash flows to the end of the project

-compounding cash inflows to the end of the project -a financing rate for discounting -a reinvestment rate for compounding -discounting all cash outflows to time 0

Which of the following present problems when using the IRR method? Multiple select question. larger cash flows later in the project mutually exclusive projects nonconventional cash flows a high discount rate

mutually exclusive projects nonconventional cash flows

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

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

One of the flaws of the payback period method is that cash flows after the cutoff date are Blank______. Multiple choice question. given greater value given special consideration reserved for future projects not considered in the analysis

not considered in the analysis

The spreadsheet function for calculating net present value is Blank______. Multiple choice question. =NPV(rate,CF0, ..., CFn) =MIRR(rate,CF0, ..., CFn) =NPV(rate,CF1, ..., CFn) + CF0 =PV(rate,CF0, ..., CFn)

=NPV(rate,CF1, ..., CFn) + CF0

Capital Blank______ is the decision-making process for accepting and rejecting projects. Multiple choice question. structure budgeting relevance spending

Budgeting

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

True or false: An advantage of the AAR is that it is based on book values, not market values. True false question.TrueFalse

False

According to the basic IRR rule, we should: Multiple choice question. reject a project if the IRR is greater than the required return. reject a project if the IRR is less than the required return. accept the project if the IRR is less than the required return. reject a project if the IRR is less than 10 percent.

Reject a project if the IRR is less than the required return.

If the IRR is greater than the Blank______, we should accept the project. Multiple choice question. required return tax rate inflation rate payback period

Required Return

When calculating NPV, the present value of the nth cash flow is found by dividing the nth cash flow by 1 plus Blank______ rate raised to the nth power. Multiple choice question. the federal funds the discount the prime the LIBOR

The Discount

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

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

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

True or false: A disadvantage of the AAR is that it does not take into account the time value of money.

True

True or false: A disadvantage of the AAR is that it does not take into account the time value of money. True false question.TrueFalse

True

True or false: A project with nonconventional cash flows will produce two or more IRRs. True false question.TrueFalse

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 United States and Canada. True false question.TrueFalse

True

True or false: Some projects, such as mines, have cash outflows followed by cash inflows and cash outflows again, giving the project multiple internal rates of return.

True

True or false: Some projects, such as mines, have cash outflows followed by cash inflows and cash outflows again, giving the project multiple internal rates of return. True false question.TrueFalse

True

True or false: The measure of average accounting profit is in the numerator of the average accounting return (AAR) formula. True false question.TrueFalse

True

The multiple rates of return problem is the possibility that more than one discount rate may make the net present value of an investment equal to

Zero

The internal rate of return is a function of Blank______. Multiple choice question. a project's opportunity costs a project's cash flows the market interest rate the cost of debt incurred by a project

a project's cash flows

The payback period can lead to foolish decisions if it is used too literally because: Multiple choice question. it ignores the initial cost. it always includes all the cash flows. it uses an arbitrary discount rate. it ignores cash flows after the cutoff date.

it ignores cash flows after the cutoff date.

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

payback period; NPV

The basic NPV investment rule is: Multiple select question. 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. accept a project if the discount rate is above zero. accept a project if the NPV is less than zero.

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.

Internal rate of return (IRR) must be compared to the Blank______ in order to determine the acceptability of a project. Multiple choice question. federal funds rate inflation rate required return

required return

When calculating NPV, the present value of the nth cash flow is found by dividing the nth cash flow by 1 plus Blank______ rate raised to the nth power. Multiple choice question. the prime the federal funds the discount the LIBOR

the discount

Which of the following are methods of calculating the MIRR of a project? Multiple select question. the discounting approach the reinvestment approach the combination approach the present value approach

the discounting approach the reinvestment approach the combination approach