Chapter 8 Quiz

The discount rate that makes the net present value equal to zero.

The Internal Rate of Return (IRR) represents which of the following: The discount rate that must be lower than the required rate of return. The discount rate that makes the net present value equal to zero. The discount rate that makes the net present value positive. The discount rate that makes the net present value negative. The discount rate that is affected by the cash flows external to the project.

The calculated payback is less than a pre-specified number of years.

The Payback Period Rule states that a company will accept a project if: The calculated payback is less than three years for all projects. The calculated payback is less than a pre-specified number of years. We can recover the costs in a reasonable amount of time. The project stays within budget. The project increases shareholder value.

It is useful for comparing mutually exclusive investments.

All of the following are advantages of the Profitability Index, except: It is useful for comparing mutually exclusive investments. It is closely related to the Net Present Value calculation. It is typically leads to the same decision as the Net Present Value. It is easy to understand and communicate. It is useful to identify the "bang for the buck".

Multiple IRR's allow the company to choose the best one when evaluating projects.

All of the following are commonly cited reasons for using the Internal Rate of Return, except: Rates of return are commonly used when considered positive projects being considered. Internal rate of return is an easy way to provide information about a proposal. The IRR does need a discount rate to complete the calculation. A high IRR can be assumed to be a positive project to consider. Multiple IRR's allow the company to choose the best one when evaluating projects.

The method incorporates the time value of money.

All of the following are disadvantages of the Payback Period, except: The method ignores the time value of money. All projects are considered based upon cash flows alone. Cash flows that extend beyond the cutoff date are not considered. The company must select a specified number of years to compare projects. The method incorporates the time value of money.

The initial investment is included when calculating the present value of the future cash flows.

All of the following are useful for understanding Profitability Index, except: A profitability index greater than 1 equals a positive NPV. A profitability index less than 1 equals a negative NPV. The initial investment is excluded when calculating the present value of the future cash flows. The initial investment is included when calculating the present value of the future cash flows. The denominator for the profitability index is the cost of the project.

Low-cost, short-term

Generally speaking, payback is best used to evaluate which type of projects? Low-cost, short-term High-cost, short-term Low-cost, long-term High-cost, long-term Any size of long-term project

zero

If an investment is producing a return that is equal to the required return, the investment's net present value will be: positive. greater than the project's initial investment. zero. equal to the project's net profit. less than, or equal to, zero.

decreases as the required rate of return increases

The net present value: decreases as the required rate of return increases. is equal to the initial investment when the internal rate of return is equal to the required return. method of analysis cannot be applied to mutually exclusive projects. ignores cash flows that are distant in the future. is unaffected by the timing of an investment's cash flows.

A combination of cash outflows and inflows.

What are non-conventional cash flows? \ A combination of cash outflows and inflows. Low cash flows followed by much higher cash flows. High cash flows followed by much lower cash flows. Small initial investments and much larger returns. A zero return on an investment.

estimating the cash flows choosing the appropriate discount rate

What are the 2 biggest challenges of the NPV method?

The profitability index will equal 1.0.

Which one of the following will occur when the internal rate of return equals the required return? The average accounting return will equal 1.0. The profitability index will equal 1.0. The profitability index will equal 0. The net present value will equal the initial cash outflow. The profitability index will equal the average accounting return.