Corporate Finance Chapter 9 Mcgraw

The three attributes of NPV are that it:

- uses cash flows - uses all the cash flows of the project - discounts the cash flows properly

One of the flaws of the payback period method is that cash flows after the cutoff date are ___.

not considered in the analysis

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

The profitability index will be bigger than one for a (negative/positive) NPV investment and less than one for a (negative/positive) NPV investment.

positive negative

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

present

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

projects are mutually exclusive cash flows are not conventional

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

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

Which of the following are mutually exclusive investments?

two different assembly lines to produce cereal; a restaurant or a gas station on the same piece of land

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

Which of the following are weaknesses of the payback method?

Cash flows received after the payback period are ignored. It gives equal weight to all cash flows before the cutoff date.

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

NPV MIRR

What are the advantages of the payback period method for management?

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 internal rate of return is a function of ____.

a project's cash flows

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

accept

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

accepted

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

capital

An independent project (does/doesn't) rely on the acceptance or rejection of another project.

doesn't

A situation in which taking one investment prevents the taking of another is called a mutually investment decision.

exclusive

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

future

A(n) ______ project does not rely on the acceptance or rejection of another project. Multiple choice question.

independent