chapter 9

IRR always recommends the wrong decision when

Starting cash flow : 1000 ending cash flow: - 2000

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

The crossover rate is the rate at which the NPV's of two projects are equal.

TRUE

The three attributes of NPV are that it

Uses all the cash flows of a project. Discounts the cash flows properly. Uses cash flows.

the PI rule for an independent project is to ___ the project if the PI is greater than 1.

accept

Payback period tells the time it takes to break even in an ____ sense. Discounted payback period tells the time it takes to break even in an ___ or financial sense.

accounting; economic

The point at which the NPV profile crosses the vertical axis is the:

because the vertical axis crosses the horizontal axis where the discount rate is zero, the NPV profile crosses the vertical axis at the sum of the cash flows (or the PV of the cash flows with a discount rate of 0)

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.

postive, negative

According to the basic IRR rule, we should

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

Steps involved in the discounted payback period in order

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

which of the following are mutually exclusive investments

1. a restaurant or a gas station on the same piece of land 2. two different choices for the assembly lines that will make the same product

When cash flows are conventional, NPV is ____.

1. equal to zero when the discount rate equals the IRR 2. negative for discount rates above the IRR 3. positive for discount rates below the IRR

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

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

Which of the following are weaknesses of the payback method?

1. time value of money principles are ignored 2. the cutoff date is arbitrary 3. cash flows received after the payback period are ignored

What is the PI for a project with an initial cash outflow of $30 and a subsequent cash inflows of $80 in Year 1 and $20 in Year 2 if the discount rate is 12%?

2.91

What is the IRR for a project with an initial investment of $250 and subsequent cash inflows of $100 per year for 3 years?

9.70%

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

ACCEPTED

Investing more money in a project will always lead to greater profits.

FALSE

The MIRR function eliminates multiple IRRs and should replace NPV

FALSE

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

MIRR NPV

In capital budgeting, the net _____ determines the values of a project to the company.

NET PRESENT VALUE

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

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

This capital budgeting method allows lower management to make smaller, everyday financial decisions effectively

Payback method

Project Alpha's NPV profile crosses the vertical axis at $230,000. Project Beta's NPV profile crosses the vertical axis at $150,000. If Projects Alpha and Beta have conventional cash flows, are mutually exclusive and the NPV profiles cross at 15% (where the NPVs are positive), which of the projects has a higher internal rate of return?

Project Beta The two projects have a crossover point above the horizontal axis, and Project Alpha crosses the vertical axis above Project Beta. Because the cash flows are conventional, their NPV profiles cross only once, so Alpha must have a steeper NPV profile, and Beta must have a higher IRR.

NPV ____ cash flows properly

discounts

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

independent

The point at which the NPV profile crosses the horizontal axis is the:

internal rate of return by definition, the internal rate of return is the discount rate that makes the NPV of the project equal to zero, which is the point at which the profile crosses the horizontal axis

IRR continues to be very popular in practice, partly because:

it gives a rate of return than a dollar value

By ignoring time value, the payback period rule may accept projects with a ______ NPV

negative

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