Production and Operation Management Exam
Weakness of AAR Method
Use of accounting values rather than cash flows, no account of timing, and arbitrary target rate
3 attributes to NPV
Uses cash flows, uses all the cash flows of a project, and discounts the cash flows properly
The net present value of a projects cash flows is divided by the _________ to calculate the profitability index
Initial investment
The dollar difference in value between mutually exclusive projects can be found by calculating the _______ of the incremental cash flows
NPV
The dollar difference in value between mutually exclusive projects can be found by calculating the _______ of the incremental cash flows.
NPV
The ________ method is ideal for companies with limited funds that have a need for a quick turnaround of their capital
Payback
For normal cash flows (the outflows occur before the inflows), the NPV is ________ if the discount rate is less than the IRR, and it is ______ if the discount rate is greater than the IRR
Positive, negative
the discount rate is determined by the _______ of a project
Risk
The internal rate of return is a function of?
a projects cash flows
The decision rule for a project for which the first cash flow is an inflow and subsequent cash flows are negative states that we should _______ the project when the IRR is ________ than the discount rate.
accept;less Reject;greater
The property of value ________ implies that the contribution of any project to a firms value is simply the NPV of the project
additivity
The average accounting return is calculated as the average net income from a project divided by the ?
average book value of the investment
Capital _________ is the decision-making process for accepting and rejecting projects
budgeting
Internal rate of return must be compared to the _________ rate in order to determine the acceptability of a project
discount
Weaknesses of discounted payback period
exclusion of some cash flows, loss of simplicity as compared to the playback method, and arbitrary cutoff date
The payback period can lead to incorrect decisions if it is used too literally because it
ignores cash flows after the cutoff date
Captal rationing requires a company to
limit their investments
The capital budgeting method allows lower management to make smaller, everyday financial decisions easily is:
payback method
In capital budgeting, the net ______ is the value of a project to the company.
present value
Weaknesses of payback method
the cutoff date is arbitrary, cash flows received after the payback period are ignored, and the time value of money principles are ignored
the IRR is the discount rate that makes the NPV of a project equal to
zero
What does value additivity mean for a firm?
The value of a firm is simply the combined value of the firms projects, divsions, and entities owned by the firm. The npv values of individual projects can be added together.