Chapter 9 Study Set

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

cash flows are not conventional projects are mutually exclusive

The profitability index is calculated by dividing the PV of the _________ cash flows by the initial investment.

future

According to Graham and Harvey's 1999 survey of 392 CFOs, in addition to IRR and NPV, which were the two most widely used techniques, over half of the respondents always, or almost always, used which of the following methods?

Payback method

A project should be __________ if its NPV is greater than zero.

accepted

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

budgeting

With nonconventional cash flows, there is a possibility that more than one discount rate will make the NPV of an investment zero. This is called the ______ rates of return problem.

multiple

The payback period rule ______ a project if it has a payback period that is less than or equal to a particular cutoff date.

suggests accepting

________ budgeting is the decision-making process for accepting and rejecting projects.

Capital

Which capital budgeting decision method finds the present value of each cash flow before calculating a payback period?

Discounted payback period

True or false: The MIRR function eliminates multiple IRRs and should replace NPV.

False

According to Graham and Harvey's 1999 survey of 392 CFOs, which of the following two capital budgeting methods are most used by firms in the United States?

Internal rate of return Net present value

If a project has multiple internal rates of return, which of the following methods should be used?

MIRR NPV

True or false: IRR approach may lead to incorrect decisions in comparison of two mutually exclusive projects.

True

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

True

The internal rate of return is a function of ____.

a project's cash flows

NPV ______ cash flows properly.

discounts

The three attributes of NPV are that it:

discounts the cash flows properly. uses all the cash flows of a project. uses cash flows.

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.

The present value of all cash flows (after the initial investment) is divided by the ______ to calculate the profitability index.

initial investment

By ignoring time value, the payback period rule may incorrectly accept projects with a (positive/negative) NPV.

negative

The spreadsheet NPV function actually calculates present value, not _______ present value, as the name suggests.

net

The IRR rule can lead to bad decisions when cash flows are _____ or projects are mutually exclusive.

not conventional

The amount of time needed for the cash flows from an investment to pay for its initial cost is the _____ period.

payback

For a project with conventional cash flows, the NPV is ______ if the required return is less than the IRR, and it is ______ if the required return is greater than the IRR.

positive, negative

Net _______ value is a measure of how much value is created or added today by undertaking an investment.

present

In capital budgeting, the net ______ determines the value of a project to the company.

present value

According to the basic IRR rule, we should _____.

reject a project if the IRR is less than the required return

Internal rate of return (IRR) must be compared to the ________ in order to determine the acceptability of a project.

required return

The spreadsheet function for calculating net present value is ____.

=NPV()

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

What are the steps involved in the discounted payback period in order starting with the first step?

1. Discount the cash flows using the discount rate. 2. Add the discounted cash flows. 3. Accept if the discounted payback period is less than some prespecified number of years.

Using the payback period rule will bias toward accepting which type of investment?

Short-term investment