Chapter 9 Net Present Value

A(n) ____ project does not rely on the acceptance or rejection of another project.

independent

Based on the IRR rule, an investment is acceptable if

the IRR exceeds the required return. It should be rejected otherwise

Payback period

the amount of time required for an investment to generate cash flows sufficient to recover its initial cost

The IRR rule can lead to bad decisions when _____ or _____.

1. projects are mutually exclusive 2. cash flows are not conventional

The three attributes of NPV are that it:

1. uses all the cash flows of a project 2. uses cash flows 3. discounts the cash flows properly

The spreadsheet function for calculating net present value is

=NPV()

True or False: Investing more money in a project will always lead to greater profits.

False

What is the NPV of a project with an initial investment of $95, a cash flow in one year of $107, and a discount rate of 6%?

NPV = -$95 + ($107/1.06) = $5.94

Net Present Value (NPV)

The difference between an investment's market value and its cost.

True or False: Some projects, such as the mines, have cash outflows followed by cash inflows, which are then followed by cash outflows, giving the project multiple rates of return.

True

Capital Corp is considering a project whose internal rate of return is 14%. If Capital's required return is 14%, the project's NPV is:

Zero

net present value profile

a graphical representation of the relationship between an investment's NPVs and various discount rates

The internal rate of return is a function of

a project's cash flows

A project should be _________ if its NPV is greater than zero

accepted

Average accounting return

an investment's average net income divided by its average book value

Capital ____ is the decision-making process for accepting and rejecting projects.

budgeting

The most important alternative to NPV is the ______ method

internal rate of return (IIR)

Based on the average accounting return rule, a project is acceptable if...

its average accounting return exceeds a target average accounting return

Based on the payback rule an investment is acceptable if

its calculated payback period is less than some prespecified number of years

Based on the discounted payback rule, an investment is acceptable if

its discount payback is less than some prespecified number of years

When cash flows are conventional, NPV is ____ if the discount rate is above the IRR.

negative

If the IRR is greater than the ___ ___, we should accept the project.

required return

The IRR on investment is the

required return that results in a zero NPV when it is used at the discount rate

The point at which the NPV Profile crosses the vertical axis is the

sum of the cash flows of the project

Internal Rate of Return (IRR)

the discount rate that makes the NPV of an investment zero

Discounted Payback Period

the length of time required for an investment's discounted cash flows to equal its initial cost