Chapter 9 Net Present Value
A(n) ____ project does not rely on the acceptance or rejection of another project.
independent
Based on the IRR rule, an investment is acceptable if
the IRR exceeds the required return. It should be rejected otherwise
Payback period
the amount of time required for an investment to generate cash flows sufficient to recover its initial cost
The IRR rule can lead to bad decisions when _____ or _____.
1. projects are mutually exclusive 2. cash flows are not conventional
The three attributes of NPV are that it:
1. uses all the cash flows of a project 2. uses cash flows 3. discounts the cash flows properly
The spreadsheet function for calculating net present value is
=NPV()
True or False: Investing more money in a project will always lead to greater profits.
False
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%?
NPV = -$95 + ($107/1.06) = $5.94
Net Present Value (NPV)
The difference between an investment's market value and its cost.
True or False: Some projects, such as the mines, have cash outflows followed by cash inflows, which are then followed by cash outflows, giving the project multiple rates of return.
True
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
net present value profile
a graphical representation of the relationship between an investment's NPVs and various discount rates
The internal rate of return is a function of
a project's cash flows
A project should be _________ if its NPV is greater than zero
accepted
Average accounting return
an investment's average net income divided by its average book value
Capital ____ is the decision-making process for accepting and rejecting projects.
budgeting
The most important alternative to NPV is the ______ method
internal rate of return (IIR)
Based on the average accounting return rule, a project is acceptable if...
its average accounting return exceeds a target average accounting return
Based on the payback rule an investment is acceptable if
its calculated payback period is less than some prespecified number of years
Based on the discounted payback rule, an investment is acceptable if
its discount payback is less than some prespecified number of years
When cash flows are conventional, NPV is ____ if the discount rate is above the IRR.
negative
If the IRR is greater than the ___ ___, we should accept the project.
required return
The IRR on investment is the
required return that results in a zero NPV when it is used at the discount rate
The point at which the NPV Profile crosses the vertical axis is the
sum of the cash flows of the project
Internal Rate of Return (IRR)
the discount rate that makes the NPV of an investment zero
Discounted Payback Period
the length of time required for an investment's discounted cash flows to equal its initial cost