Chapter 8: Net Present Value and Other Investment Criteria

What is the profitability index for a project with an initial cash outflow of $30 and subsequent cash inflows of $80 in year one and $20 in year two if the discount rate is 12%? (2.91) (0.52) 2.91 0.52

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? 23.38% -13.67% 21.86% 9.70%

9.70%

Specifying variables in the Excel NPV function differs from the manner in which they are entered in a financial calculator in which of the following ways? (multiple answers) The Excel NPV function is actually a Pv function With the Excel NPV function, Cashflow #0 must be handled outside the NPV function the discount rate in Excel specified in Excel begins with cash flow #1, not cash flow 0. There are no significant differences between variable entry in Excel and in a financial calculator The range of cash flows specified in Excel begins with cashflow #1, not cashflow 0.

The Excel NPV function is actually a Pv function With the Excel NPV function, Cashflow #0 must be handled outside the NPV function the discount rate in Excel specified in Excel begins with cash flow #1, not cash flow 0. The range of cash flows specified in Excel begins with cashflow #1, not cashflow 0.

What is the NPV of a project with an initial investment of $95, a cash flow in one year of $107, and a discount rate of 6 percent? $6.17 $12 $11.32 $5.94

$5.94

Which of the following are methods of calculation the MIRR of a project? (multiple answers) the Reinvestment Approach The Present Value Approach The Discounting Approach The Combination Approach

The Reinvestment Approach The Discounting Approach The Combination Approach

A project should be _________________ if its NPV is greater than zero. accepted rejected delayed

accepted

the payback period rule _________ a project if it has a payback period that is less than or equal to a particular cutoff date accepts rejects

accepts

Which of the following is a disadvantage of the profitability index? easy to understand cannot rank mutually exclusive projects is closely related to NPV useful when capital is rationed

cannot rank mutually exclusive projects

In general NPV is _____________. (multiple answers) equal to zero when the discount rate equals the IRR negative for discount rates above the IRR positive for discount rates below the IRR positive for discount rates above the IRR

equal to zero when the discount rate equals the IRR negative for discount rates above the IRR positive for discount rates below the IRR

A __________________ project does not rely on the acceptance of rejection of another project. co-dependent mutually exclusive dependent independent

independent

______________ is measure of how much value is created or added by undertaking an investment. an investment's market value net future value an investment's social value new present value

net present value

The ______________ is best suited for decisions on relatively small, minor projects while _____________ is more appropriate for large complex projects. IRR;NPV payback period;NPV payback period;URL

payback;NPV

According to the basic IRR rule, we should: reject a project if the IRR is less than the required return reject project if the IRR is greater than the required return reject the project if the IRR is less than 10% accept the project if the IRR is less than the required return

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. federal funds rate inflation rate required return

required return

True or False: Payback period ignores time value of money.

true

True or False: Some projects, such as mine, have cash outflows followed by cash inflows and cash outflows again, giving the project multiple internal rates of return.

true

If a project has multiple internal rates of return, which of the following methods should be used? (Multiple answers) MIRR NPV IRR

MIRR NPV

Which of the following are reasons why IRR continues to be used in practice? (multiple answers) the IRR allows the correct ranking of projects it is easier to communicate information about a proposal with an IRR the IRR of a proposal can be calculated without knowing the appropriate discount rate business people prefer to talk about rates of return

it is easier to communicate information about a proposal with an IRR the IRR of a proposal can be calculated without knowing the appropriate discount rate business people prefer to talk about rates of return

The IRR is the discount rate that makes NPV equal to ___________. zero the payback period the terminal book value of the project's fixed assets $42

zero

The PI rule for an independent project is to __________ the project if the PI is greater than 1. accept delay reject

accept

One of the weaknesses of the payback period is that the cutoff date is a _________________ standard. arbitrary perfect industry market

arbitrary

The payback period can lead to foolish decisions if it is used too literally because: it always include all the cash flows it ignores the initial cost it uses the arbitrary discount rate it ignores cash flows after the cutoff date

i ignores cash flows after the cutoff date

The present value of the future cash inflows are divided by the ___________ to calculate the profitability index. new present value discount rate initial investment internal rate of return

initial investment

Higher cash flows earlier in a project's life are ____________ valuable than higher cash flows later on. less more

more

Which of the following present problems when using the IRR method? non-conventional cash flows a high discount rate mutually exclusive projects larger cash flows later in the project

non-conventional cash flows mutually exclusive projects