Chapter 8 review business finance

The basic NPV investment rule is:

-If the NPV is equal to zero, acceptance or rejection of the project is a matter of indifference. -Accept a project if the NPV is greater than zero -Reject a project if its NPV is less than zero

which of the following presents a problem when using the IRR method?

mutually exclusive projects & non conventional cash flows

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

npv & mirr

the ____method evaluates a project by determining the time needed to recoup the initial investment

payback

the npv is _____ if the required return is less than the IRR and it is _______if required return is greater than the IRR

pos, neg

when calculating the npv the present value of the nnth cash flow is found by dividing the nth cash flow by 1 plus ______rate raised to the nth power

the discount

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?

the excel npv function is actually a pv function the range of cash flow specified in excel begins with cash flow #1 not cash flow 0 the discount rate in excel is entered as a decimal or as a percentage with a parent sign

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 pi is greater than 1

accept

a project should be_____if npv is greater than zero

accepted

how does timing and the size of cash flows affect the payback method? assume the project does pay back within the projects lifetime

an increase in the size of the first cash inflow will decrease the payback period all else held constant

the average accouting return is defined as

avg Ni/ avg book value

which of the following is a disadvantage of the PI

cannot rank mutually exclusive projects

which of the following are weaknesses of the payback method

cash flows received after the payback are ignored the cutoff date is arbitrary time value of money principles are ignored

the combination mirr method is used by the excel mirr function and uses which of the following ?

compounding cash inflows to the end of the project a reinvestment rate for compounding a financing rate for discounting discounting all cash inflows to time zero

an advantage of the aar is that it is based on book values not market values

false

the profitability index is calculated by dividing the PV of the ____cash inflows by the initial investment

future

the present value of the future cash flows are divided by the____to calculate the profitability index

initial investment

Capital Budgeting is probably the most important of the three key areas of concern to the financial manager because

it defines the business of the firm

which of the following are reasons why irr continues to be used in practice

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

what is the irr of a project with an initial investment of 250 and subsequent cash inflows of 100 per year for 3 years

9.7 %

mutually exclusive

Events that cannot occur at the same time.

in capital budgeting ___determines the dollar value of a project to the company

NPV

according to the basic IRR rule we should

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

which of the following are methods of calculating the MIRR of a project

the combination, discounting & reinvestment approach

According to the average accounting return rule, a project is acceptable if its average accounting return exceeds:

a target average accounting return