FIN 101 - CH 8

If a project has multiple internal rates of return, which of the following methods should be used? Select all that apply. a) NPV b) IRR c) MIRR

a) NPV c) MIRR

The Combination MIRR method is used by the Excel MIRR function and uses which of the following? Select all that apply. a) A single discount rate for both discounting and compounding. b) A reinvestment rate for compounding. c) A financing rate for discounting. d) Compounding cash inflows to the end of the project. e) Discounting ALL cash inflows to time 0. f) Compounding ALL cash flows to the end of the project. g) Discounting all cash outflows to time 0.

b) A reinvestment rate for compounding. c) A financing rate for discounting. d) Compounding cash inflows to the end of the project. g) Discounting all cash outflows to time 0.

T/F: Payback period ignores time value of money.

True

In general, NPV is _. Select all that apply. a) negative for discount rates above the IRR. b) positive for discount rates above the IRR. c) equal to zero when the discount rate equals the IRR. d) positive for discount rates below the IRR.

a) negative for discount rates above the IRR. c) equal to zero when the discount rate equals the IRR. d) positive for discount rates below the IRR.

The PI rule for an independent project is to _ the project if the PI is greater than 1. a) delay b) accept c) reject

b) accept

T/F: Some projects, such as mines, have cash outflows followed by cash inflows and cash outflows again, giving the project multiple internal rates of return.

True Whenever subsequent cash flows are both negative and positive, multiple internal rates of return may occur.

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%? a) $5.94 b) $12 c) $6.17 d) $11.32

a) $5.94 = -$95 + ($107/1.06) = $5.94

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%? a) 2.91 b) (0.52) c) 0.52 d) (2.91)

a) 2.91

Which of the following are reasons why IRR continues to be used in practice? Select all that apply. a) Businesspeople prefer to talk about rates of return. b) It is easier to communicate information about a proposal with an IRR. c) The IRR of a proposal can be calculated without knowing the appropriate discount rate. d) The IRR allows the correct ranking of projects.

a) Businesspeople prefer to talk about rates of return. b) It is easier to communicate information about a proposal with an IRR. c) The IRR of a proposal can be calculated without knowing the appropriate discount rate.

Which of the following present problems when using the IRR method? Select all that apply. a) non-conventional cash flows b) mutually exclusive projects c) larger cash flows later in the project d) a high discount rate

a) non-conventional cash flows b) mutually exclusive projects

According to the average accounting return rule, a project is acceptable if its average accounting return exceeds: a) the internal rate of return. b) the net present value. c) a target average accounting return. d) the required rate of return.

c) a target average accounting return.

The payback period can lead to foolish decisions if it is used too literally because: a) it always includes all the cash flows. b) it uses an arbitrary discount rate. c) it ignores cash flows after the cutoff date. d) it ignores the initial cost.

c) it ignores cash flows after the cutoff date.

If the IRR is greater than the _ _, we should accept the project. a) inflation rate b) tax rate c) payback period d) required return

d) required return

The present value of the future cash inflows are divided by the _ to calculate the profitability index. a) net present value b) initial investment c) internal rate of return d) discount rate

b) initial investment

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? a) The discount rate in Excel is entered as a decimal, or as a percentage with a percent sign. b) The range of cash flows specified in Excel begins with cashflow #1, not cashflow 0. c) There are no significant differences between variable entry in Excel and in a financial calculator. d) With the Excel NPV function, Cashflow #0 must be handled outside the NPV function. e) The Excel NPV function is actually a PV function.

a) The discount rate in Excel is entered as a decimal, or as a percentage with a percent sign. b) The range of cash flows specified in Excel begins with cashflow #1, not cashflow 0. d) With the Excel NPV function, Cashflow #0 must be handled outside the NPV function. e) The Excel NPV function is actually a PV function.

The basic NPV investment rule is: Select all that apply. a) accept a project if the NPV is less than zero. b) accept a project if the NPV is greater than zero. c) reject a project if tis NPV is less than zero. d) accept a project if the discount rate is above zero. e) if the NPV is equal to zero, acceptance or rejection of the project is a matter of indifference.

b) accept a project if the NPV is greater than zero. c) reject a project if tis NPV is less than zero. e) if the NPV is equal to zero, acceptance or rejection of the project is a matter of indifference.

Capital budgeting is probably the most important of the three key areas of concern to the financial manager because _. a) its the least understood. b) it defines the business of the firm. c) its the most difficult. d) its the most controversial.

b) it defines the business of the firm.

The _ method evaluates a project by determining the time needed to recoup the initial investment. a) accounting rate of return b) payback c) internal rate of return

b) payback

The NPV is _ if the required return is less than the IRR, and it is _ if the required return is greater than the IRR. a) negative; negative b) positive; negative c) positive; positive d) negative; positive

b) positive; negative

One of the flaws of the payback period method is that cash flows after the cutoff date are _. a) given special consideration. b) given greater value. c) not considered in the analysis. d) reserved for future projects.

c) not considered in the analysis.

The _ best suited for decisions on relatively small, minor projects while _ is more appropriate for large complex projects. a) payback period; URL b) IRR; NPV c) payback period; NPV

c) payback period; NPV

If a firm is evaluating two possible projects, both of which require the use of the same production facilities, and taking one project means that we cannot take the other, these projects would be considered _. a) inter-dependent. b) independent. c) mutually exclusive. d) co-dependent.

c) mutually exclusive.