FIN611 Chapter 10 Test Review, Chapter 10 - Capital Budgeting, Finance 5320-Chapter 10-Vocabulary: The Basics of Capital Budgeting: Evaluating Cash Flows, FMGT 4510 Chapter 10

Internal Rate of Return (IRR)

The discount rate that equates the present value of the expected future cash inflows and outflows. IRR measures the rate of return on a project, but it assumes that all cash flows can be reinvested at the IRR rate.

Profitability Index

Represents the relationship between the costs and benefits of a proposed project. If it's greater than 1 tell us that the NPV of the project is positive.

interanl rate of return method

(IRR) - the discount rate that equatres the repsent value of the expected future cash inflows and outflows. IRR Measures the rate of return on a project, but it assumes that all cash flows can be reinvested at the IRR rate. defined as the discount rate that forces a project's NPV to equal zero. The project should be accepted if the IRR is greater than the cost of capital.

net presente value method

(Net present value) - The present valueof the proects expected future cash flows, discounted at the approopriate cost of capital. NPV is a direct measure of the project to shareholders. method? is calculated by discounting of the project's cash flows at the project's cost of capital and then summing those cash flows. The project should be accepted if the NPV is positive because such a project increases shareholders' value.

MIRR > IRR

1) It incorporates a better reinvestment rate assumption. 2) It avoids the multiple rate of return problem.

What are some possible reasons that a pojects might have a high NPV?

1)The project has a competitive edge above other projects from other projects of competitors and hence higher free cash flow will be generated which will result in higher NPV. 2) When the WACC of a project is low if the company gets access to cheaper source of debt and equity then NPV will be higher

What three flwas does the regular payback method have? Does the discounted payback method correct all these flaws?

1. All dollars received in different years are given in the same weight (biased against long term projects) 2. Cash flows beyond the payback year are given no consideration regardless of how large they might be 3. Unlike the NPV, which tells us how much wealth a project adds, and the IRR, which tells us how much a project yields over the cost of capital, the payback merely tells us when we will recover an investment 4. May reject positive NPV projects

Describe in words how an NPV profile is constructed. How do you determine the intercepts ofr the x axis and the y axis?

1. Find the project's NPV at a number of different discount rates and then plot those values to create a graph 2. Y-Intercept: A zero cost of capital, NOV is net total of undercounted cash flows 3. X-Intercept: Discount rate at which the profile crosses the horizontal axis is the project's IRR

Whats the primary difference between the MIRR and the regular IRR?

1. MIRR: Discount rate at which present value of its terminal value is found as the sum of the future values of the cash inflows, compounded at the firm's cost of capital. 2. It is similar to the IRR except that it is based on the assumption that cash flows are reinvested at the WACC (or some other explicit rate that is a more reasonable assumption)

What two characteristic can lead to conflict between the NPV and the IRR when evaluating mutually exclusive projects?

1. Timing differences: If most of the cash flows from one project come in early while most of those from the other project come in later, the NPV profiles may cross and result in a conflict 2. Project size (or scale) differences: If the amount invested in one project is larger than the other, this too can lead to profiles crossing and a resulting conflict

NPV Method

A method based on DCF technique that is used in capital budgeting in which net cash flows are discounted to their present value and then compared to the capital outlay required by the investment.

Equivalent Annual Annuity Method

A method for comparing mutually exclusive projects with unequal lives. The NPVs of the projects are converted into an annuity payment with a life equal to the life of the project. The project with the higher annuity should be selected.

replacement chain

A method of comparing mutually exclusive projects that have unequal lives. Each project is replicated so that they will both terminate in a common year. If projects with lives of 3 years and 5 years are being evaluated, then the 3 year project would be replicated 5 times and the 5 year project replicated 3 times, thus; both projects would terminate in 15 years.

Replacement Chain (common life) approach

A method of comparing mutually exclusive projects that have unequal lives. Each project is replicated so that they will both terminate in a common year. If projects with lives of 3 years and 5 years are being evaluated, then the 3 year project would be replicated 5 times and the 5 year project replicated 3 times; thus, both projects would terminate in 15 years.

DCF Technique

A method of valuing a business that involves the application of capital budgeting procedures to an entire firm rather than a single project.

IRR Method

A method used in capital budgeting that results in finding the interest yield of the potential investment.

normal cash flow projects

A project with one or more cash outflows (costs) followed by a series of cash inflows. Note that signs of the cash flows change only once, when they go from negative or positive ( or from positive to negative)

Normal Cash Flow project

A project with one or more cash outflows (costs) followed by a series of cash inflows. Note that the signs of the cash flows change only once, when they go from negative to positive (or from positive to negative).

Long, Quite Risky

Payback period tells us how _________ will be tied up (how liquid is it), and also the projects cash flows are forecast out into the future telling us it is _____ _______.

Modified IRR (MIRR)

Assumes that cash flows from all projects are reinvested at the cost of capital, not at the project's own IRR. This makes the modified internal rate of return a better indicator of a project's true profitability.

modified internal rate of return (MIRR)

Assumes that cash flows from all projects are reinvested at the cost of capital, not at the projects own IRR. This makes the modified interregnal rate of return a better indicator of a proejcts true profitbability. Unlike the IRR, a project never has more than one modified IRR (MIRR). MIRR requires finding the terminal value of the cash inflows, compounding them at the firm's cost of capital, and then determining the discount rate that forces the present value of the TV to equal the present value of the outflows.

International Advertising Services has two projects that are mutually exclusive and have normal cash flows. Project A has an IRR of 15% and Project B's IRR is 20%. International's WACC is 12%, and at that rate, Project A has the higher NPV. Which of the following statements is correct? Assuming the two projects have the same scale, Project B probably has a faster payback than Project A. The crossover rate for the two projects must be less than 12%. As Project B has the higher IRR, then it must also have the higher NPV if the crossover rate is less than the WACC of 12%. Assuming the timing pattern of the two projects' cash flows is the same, Project B probably has a higher cost (and larger scale). The crossover rate for the two projects must be 12%.

Assuming the two projects have the same scale, Project B probably has a faster payback than Project A.

What is the crossover rate, and how does it interact with the cost of capital to determine whether or not a conflict exists between NPV and IRR?

Crossover rate: cost of capital at which the NPV profiles of two projects cross and thus, at which the project's NPV's are equal. Calculated by IRR of differences in projects' cash flows

MIRR

Discount rate that causes the PV of a project's terminal value (TV) to equal the PV of costs.

Liquidity, Risk

Discounted payback periods are faulty as ranking criteria but they do tell us about __________ and ______.

multiple IRRs

Existence of more than one internal rate of return based on projects cash flows and can occur when a project has nonnormal cash flows. In this situation, none of the calculated IRRs provide useful information.

If a project would lead to an increase in a firm's cost of capital (its WACC), it should NOT be accepted. True False

False A firm should accept all positive NPV projects. Even with the higher cost of capital, the company should go ahead and raise external equity and accept the project.

If the NPV ranking conflicts with the PI ranking, then the PI ranking should be used. True False

False If the PI ranking conflicts with the NPV, then the NPV ranking should be used.

Projects with nonnormal cash flows sometimes have multiple MIRRs. True False

False Multiple IRRs occur in projects with nonnormal cash flows, but there is only one MIRR for each project.

The NPV and MIRR methods lead to the same decision for mutually exclusive projects regardless of the projects' relative sizes. True False

False NPV and MIRR criteria may not lead to the same decision when the projects differ in scale (project size or timing of cash flows).

If a firm has zero cost of capital and two mutually exclusive projects, the payback method and NPV method would always lead to the same decision on which project to undertake. True False

False One project might have cash flows that extend well past the payback year, leading to different rankings.

Other things held constant, a decrease in the cost of capital (discount rate) will cause an increase in a project's IRR. True False

False The IRR calculation is independent of the project's cost of capital.

Mathematically, the NPV, IRR, MIRR, and PI methods will always lead to the same accept/reject decisions for mutually exclusive projects that differ in size or timing of cash flows. True False

False These methods will always lead to the same accept/reject decisions for normal, independent projects, but can give conflicting rankings for mutually exclusive projects if the projects differ in size or in the timing of cash flows.

Profitability Index (PI)

Found by dividing the project's present value of future cash flows by its initial cost. A profitability index greater that 1 is equivalent to a project's having positive net present value.

NPV Profile

Graph showing a project's NPV on the y axis for different costs of capital on the x axis.

Rate of Return

IRR also measures profitability, in this case measured as a percentage of ______ __ _______, many decision makers prefer this in how it frames the data.

Which of the following statements is correct? If a project has an IRR greater than zero, then taking on the project will increase the value of the company's common stock because the project will make a positive contribution to net income. If a project has an NPV greater than zero, then taking on the project will increase the value of the firm's stock. Assume that you plot the How to Use the Different Capital Budgeting Methods of two mutually exclusive projects with normal cash flows and that the cost of capital is greater than the rate at which the profiles cross one another. In this case, the NPV and IRR methods will lead to contradictory rankings of the two projects. For independent (as opposed to mutually exclusive) normal projects, the NPV and IRR methods will generally lead to conflicting accept/reject decisions. Statements b, c, and d are true.

If a project has an NPV greater than zero, then taking on the project will increase the value of the firm's stock.

Assuming that a project being considered has normal cash flows, with one outflow followed by a series of inflows, which of the following statements is accurate? If Project A has a higher IRR than Project B, then Project A must also have a higher NPV. If Project A has a higher IRR than Project B, then Project A must have the lower NPV. The IRR calculation implicitly assumes that all cash flows are reinvested at the WACC. If a project has normal cash flows and its IRR exceeds its WACC, then the project's NPV must be positive. The IRR calculation implicitly assumes that cash flows are withdrawn from the business rather than being reinvested in the business.

If a project has normal cash flows and its IRR exceeds its WACC, then the project's NPV must be positive.

Normal Cash Flows

If a project has one or more cash outflows (costs) followed by a series of cash inflows. They only have one change in sign, they begin as negative cash flows, change to positive cash flows, and then remain positive.

NPV, IRR

If independent projects are being evaluated then the ______ and ______ criteria will lead to the same conclusion (accept or reject).

Briefly describe the replacement chain (commenad life) approach, and then differentiate it from the equivalent annual annuity (EAA) approach

If mutually exclusive projects have unequal lives, it may be necessary to adjust the analysis to put the projects on an equal-life basis. This can be done using the replacement chain (common life) approach or the equivalent annual annuity (EAA) method. replacement chain - EAA -

Mutually Exclusive

If one project is taken on, the other must be rejected.

What is the difference between "independent" and mutually exclusive" projects?

Independent projects: if the cash flows of one are unaffected by the acceptance of the other. Mutually exclusive projects: if the cash flows of one can be adversely impacted by the acceptance of the other.

Net Present Value (NPV)

Is defined as the present value of a project's expected cash flows (including its initial cost) discounted at the appropriate risk-adjusted rate. The NPV measures how much wealth the project contributes to shareholders. When deciding which projects to accept, NPV is generally regarded as the best single criterion.

Which of the following statements regarding mutually exclusive projects with unequal lives is NOT accurate? To apply the equivalent annual annuity (EAA) method, find the constant payment streams that the projects' NPVs would provide over their respective lives. The key to the replacement chain (common life) approach for projects that will have to be repeated in the future is to analyze both projects over an equal life. It is appropriate to extend the analysis to a common life even if the probability that a project will actually be repeated at the end of its initial life is low. When choosing between two mutually exclusive alternatives with significantly different lives, an adjustment is necessary. Serious weaknesses in the replacement chain (common life) approach include that it does not account for inflation and new technology that could affect future replacements and change the cash flows.

It is appropriate to extend the analysis to a common life even if the probability that a project will actually be repeated at the end of its initial life is low.

Should capital budgeting decisions be made solely on teh basic of a projects NPV, with no regard to the other criteria?

It is easy to calculate all of them, all should be considered when capital budgeting decisions are made. For most decisions, the greatest weight should be given to NPV, but it would be foolish to ignore the information by other criteria

Hurdle Rate

Minimum acceptable rate of return (set by management) for an investment.

Multiple IRRs

More than one IRR resulting from a capital budgeting project with a nonconventional cash flow pattern; the maximum number of IRRs for a project is equal to the number of sign changes in its cash flows.

Which of the following statements regarding IRR and WACC is accurate? Multiple IRRs can only occur if the direction of the cash flows changes more than once. A project cannot have multiple IRRs if it is independent. If a project has two IRRs, then the smaller one is the one that is most relevant, and it should be accepted and relied upon. Two projects are likely to have multiple IRRs if they are mutually exclusive. For a project to have more than one IRR, then both IRRs must be greater than the WACC.

Multiple IRRs can only occur if the direction of the cash flows changes more than once.

Describe the advantages and disadvantages of the six capital budgetnig methods

NPV IRR MIRR PI payback discounted payback.

Dollar Benefit

NPV is important because it gives us a direct measure of the ______ ______ of the project to shareholders, making NPV the best measure of profitability.

EVA

NPV is the present value of the project's future ______.

Mutually Exclusive Projects

NPV method should be used for these types of projects.

Which of the following measures established for screening projects is considered the best single measure? Modified internal rate of return (MIRR) Internal rate of return (IRR) Profitability index (PI) Net present value (NPV) Discounted payback

Net present value (NPV) The NPV is the best single measure, primarily because it directly relates to the firm's central goal of maximizing intrinsic value.

Non-Normal Cash Flows

Occur when there is more than one change of inflow to outflow and vice versa.

Capital Rationing

Occurs when investors or management place a constraint on the size of the firm's capital budget during a particular period.

capital rationing

Occurs when management places a constraint on the size of the firm's capital budget during a particular period.

Hard Capital Rationing

Occurs when the funds allocated to managers under the capital budget cannot be increased.

What condition regatding cash flows would cause more than one IRR to exist?

One such condition is when, in addition to the initial investment at time = 0, a negative cash flow (or cost) occurs at the end of the project's life.

Which of the following project evaluation measures determines how much value a project creates for each dollar of the project's cost? MIRR IRR PI NPV RPP

PI The profitability index (PI) measures how much value a project creates for each dollar of the project's cost.

Cost of a Project

PI measures profitability relative to the ________ ___ __ ________.

Which of the following is NOT a project evaluation measure? Modified internal rate of return (MIRR) Internal rate of return (IRR) Profitability payback Net present value (NPV) Discounted payback

Profitability payback Profitability payback is not a project evaluation measure. The six project evaluation measures are (1) net present value, (2) internal rate of return (IRR), (3) modified internal rate of return (MIRR), (4) profitability index, (5) regular payback, and (6) discounted payback.

independent projects

Projects that can be accpeted or rejected individually The NPV and IRR methods make the same accept/reject decisions for independent projects,

mutually excusive projects

Projects that cannot be performed at the same time. A company could choose either Porject 1 or Proehct 2, or it can rehect both but it acnnot accept both projects. if projects are mutually exclusive, then ranking conflicts can arise. In such cases, the NPV method should generally be relied upon.

Independent Projects

Projects with cash flows that are not affected by the acceptance or non-acceptance of other projects.

Nonnormal Cash Flow projects

Projects with cash flows that change signs more than once. For example, cash flow is negative at beginning of project, becomes positive, and then becomes negative again. Nonnormal cash flows can have multiple internal rates of return.

nonnormal cash flow projects

Projects with cash flows that change signs more than once. For example, cash flow is negative at beginning of the project, it becomes positive, and then becomes negative again. Nonnormal cash flows can have multiple internal rates of return.

optimal capital budget

Set of projects that maximizes the value of the firm.

Soft Capital Rationing

Situation in which a firm limits its capital expenditures to less than the amount required to fund the optimal capital budget.

linear programming for capital budgeting

Technique to find maximum (or minimum) value of a linear objective function subject to linear constraints. Can be used to select the optimal mix of projects if constraints preclude accepting all NPV project.

Why is NPV the primary capital budgeting decision criterion?

Tells us how a project contributes to shareholder wealth - the alrger the PNV, the mroe value the project adds, and added value measn a higher stock price.

Which of the following statements regarding IRR and NPV is accurate? The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the IRR. The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the risk-free rate. The NPV method does not consider all relevant cash flows, particularly cash flows beyond the payback period. The NPV method assumes that cash flows will be reinvested at the risk-free rate, while the IRR method assumes reinvestment at the IRR. The IRR method does not consider all relevant cash flows, particularly cash flows beyond the payback period.

The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the IRR.

Payback Period

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

Reinvestment rate assumtion

The basic cause of the conflict is differing reinvestment rate assumptions between NPV and IRR: NPV assumes that cash flows can be reinvested at the cost of capital, whereas IRR assumes that reinvestment yields the (generally) higher IRR. The high reinvestment rate assumption under IRR makes early cash flows especially valuable, so short-term projects look better under IRR.

Post Audit

The comparison of the actual results of capital investments to the projected results.

Terminal Value

The compounded future value of cash inflows.

marginal cost of capital

The cost of capital associated with the next dollar of investment. It may increase if new external funds have flotation costs or other incremental costs in addition to the required rate of return.

Crossover Rate

The cost of capital at which the NPV profiles for two projects intersect. One project has a higher NPV below the crossover rate but the other project has a higher NPV above the crossover rate.

crossover rate

The cost of capital at which the NPV profiles for two projects intersect. One project has a higher NPV below the crossover rate but the other projects has a higher NPV above the crossover rate.

post-audit program

The final aspect of the capital budgeting process. The post-audit is a feedback process in which the actual results are compared with those predicted in the original capital budgeting analysis. The post-audit has several purposes, of which the most important are to improve forecasts and operations.

If a project being considered has normal cash flows, with one outflow followed by a series of inflows, which of the following statements is accurate? The higher the WACC used to calculate the NPV, the lower the calculated NPV will be. A project's NPV is generally found by compounding the cash inflows at the WACC to find the terminal value (TV), then discounting the TV at the IRR to find its PV. If a project's NPV is greater than zero, then its IRR must be less than zero. The NPVs of relatively risky projects should be found using relatively low WACCs. If a project's NPV is greater than zero, then its IRR must be less than the WACC.

The higher the WACC used to calculate the NPV, the lower the calculated NPV will be.

Discounted Payback Period

The length of time required for an investment's discounted cash flows to equal its initial cost, it takes into account the cost of capital.

physical or engineering life

The maximum potential life of a project; also called engineering life. This can exceed the optimal economic life.

discounted payback period

The number of eyars it takes a firm to recover its project invesment based on discounted cash flows. similar to the regular payback except that it discounts cash flows at the project's cost of capital. It considers the time value of money, but it still ignores cash flows beyond the payback period.

economic life

The number of years a project should be operated to maximize its net present value; often less than the maximum potential life.

Discounted Payback

The number of years it takes a firm to recover its project investment based on discounted cash flows.

payback period

The number of years it takes a firm to recover its project investment. Payback does not capture a project's entire cash flow stream and it thus not the preferred evaluation method. Note, however, that the payback does measure a project's liquidity, so many firms use it as a risk measure. as the number of years required to recover a project's cost. The regular payback method has three flaws: It ignores cash flows beyond the payback period, it does not consider the time value of money, and it doesn't give a precise acceptance rule. The payback method does, however, provide an indication of a project's risk and liquidity because it shows how long the invested capital will be tied up.

IRR

The point at which the NPV profile crosses the horizontal axis indicates a project's ______.

Capital Budgeting

The process of planning and managing a firm's long-term investments.

Optimal Capital Budget

The set of projects that maximizes the value of the firm.

In what sense is a projects IRR similiat to the YTM on a bond?

They are the same thing. Think of a bond as a project. The YTM on the bond would be the IRR of the "bond" project. EXAMPLE: Suppose a 10-year bond with a 9% annual coupon and $1,000 par value sells for $1,134.20. Solve for IRR = YTM = 7.08%, the annual return for this project/bond.

A project is described as having normal cash flows, meaning one outflow followed by a series of inflows. Which of the following statements regarding normal cash flows is accurate? A project's regular IRR is found by discounting the cash inflows at the WACC to find the present value (PV), then compounding this PV to find the IRR. To find a project's IRR, we must solve for the discount rate that causes the PV of the inflows to equal the PV of the project's costs. If a project's IRR is greater than the WACC, then its NPV must be negative. A project's regular IRR is found by compounding the cash inflows at the WACC to find the terminal value (TV), then discounting this TV at the WACC. To find a project's IRR, we must find a discount rate that is equal to the WACC.

To find a project's IRR, we must solve for the discount rate that causes the PV of the inflows to equal the PV of the project's costs.

Assume that a project has one initial cash outflow followed by a series of positive cash inflows. To use the modified internal rate of return (MIRR) method, you would compound the cash inflows out to the end of the project's life, sum those compounded cash flows to form a terminal value (TV), and then find the discount rate that causes the PV of the TV to equal the project's cost. True False

True

In general, small businesses use DCF capital budgeting techniques less often than large businesses do. This may reflect a lack of knowledge on the part of small firms' managers, but it may also reflect a rational conclusion that the costs of using DCF analysis outweigh the benefits of these methods for very small firms. True False

True

The IRR method can be used in place of the NPV method for all independent projects. True False

True

In theory, capital budgeting decisions should depend solely on forecasted cash flows and the opportunity cost of capital. Managers' tastes, choice of accounting method, or the profitability of other independent projects should not be considered. True False

True A firm should accept all positive NPV projects, regardless of other considerations.

Among the conditions that may cause a project to have more than one IRR, one might be the situation in which a negative cash flow (or cost) occurs at the end of the project's life in addition to the initial investment at time = 0. True False

True More than one negative cash flow will cause a project to have multiple IRRs.

The NPV method is preferred over the IRR method because the NPV method's reinvestment rate assumption is better. True False

True Project cash flows are substitutes for outside capital. Thus, the opportunity cost of these cash flows is the firm's cost of capital, adjusted for risk. The NPV method uses this cost as the reinvestment rate, while the IRR method assumes reinvestment at the IRR.

equivalent annual annuity (EAA)

Use to compare mutually exclusive prjects with different lifespans. Convert the unequal annual cash flows of a project into a constant cash flow stream (Ie, an annuity) whose NPV is equal to the NPV of the initial stream. Do for both projects and compare the annuities.

Equivalent Annual Annuity (EAA) method

Use to compare mutually exclusive projects with different lifespans. Convert the unequal annual cash flows of a project into a constant cash flow stream (i.e., an annuity) whose NPV is equal to the NPV of the initial stream. Do for both projects and compare the annuities.

Differentiate between a projects physical life and its economic life

a project's true value may be greater than the NPV based on its physical life if it can be terminated at the end of its economic life.

The second step in project analysis is to: calculate net present value. perform a risk assessment. calculate the evaluation measures. estimate the project's expected cash flows. determine the cost of financing.

calculate the evaluation measures.

Armbrister Pyrotechnics Inc. has imposed a limit of $50 million for capital expenditures, causing it to forgo a number of value-adding projects. This is an example of: capital rationing. a marginal cost of capital. linear programming. an optimal capital budget. a post-audit program.

capital rationing. Sometimes firms set an upper limit on the size of their capital budgets, which is known as capital rationing.

Which of the following types of decisions would most likely be made at the board level? replacement needed to continue profitable operations replacement to reduce costs expansion of existing products or markets contraction decisions all of these decisions

contraction decisions Downsizing decisions are made at the board level.

what factors can lead to an increasing marginal cost of capital? How might this affect capital budgeting?

cost of capital may increase as the capital budget increases—this is called an increasing marginal cost of capital

The first step in project analysis is to: calculate net present value. perform a risk assessment. estimate the payback period. estimate the project's expected cash flows. determine the cost of financing.

estimate the project's expected cash flows.

profitability index (PI)

found by dividing the projects present value of furutre cash flows by its initial cost. A profitbabilty index greater than 1 is equivalent toa poecjts positive net present value is calculated by dividing the present value of cash inflows by the initial cost, so it measures relative profitability—that is, the amount of the present value per dollar of investment.

The time period in which a project is maximizing NPV and thus shareholder wealth is called the project's: economic life. physical life. golden life. engineering life. optimal life.

golden life.

A project is acceptable if its PI is: greater than 0.5; the higher the better. less than 0.5; the lower the better. less than 1.0; the lower the better. equal to 0. greater than 1.0; the higher the better.

less than 1.0; the lower the better. A project is acceptable if its PI is greater than 1.0. Projects with higher PIs should be ranked above projects with lower PIs.

What is capital rationing?

occurs when management places a constraint on the size of the firm's capital budget during a particular period.

What are three explantionas for capital rationing? How might firms otherwise handle these situations?

reluctance to issue new stock, constraints on nonmonetary resources, controlling estimation bias.

To overcome estimation bias, some firms: limit the size of the capital budget. require managers to use an unrealistically short economic life. use post-audit programs that link the accuracy of forecasts to the compensation of the managers who initiate the projects. require managers to use an unrealistically high cost of capital. require managers to use an unrealistically high cost of capital, limit the size of the capital budget, and/or use post-audit programs that link accuracy to compensation.

require managers to use an unrealistically high cost of capital, limit the size of the capital budget, and/or use post-audit programs that link accuracy to compensation.

Which of the following types of decisions might be made in order to comply with the terms of an insurance policy? expansion of existing products or markets replacement to reduce costs contraction decisions replacement needed to continue profitable operations safety and/or environmental projects

safety and/or environmental projects

What is the first step in project analysis?

to estimate the project's expected cash flows.