FIN 3601 Ch 9 smartbook

The IRR is the discount rate that makes the NPV of a project equal to ______.

Zero

True or false: Some projects, such as mines, have cash outflows followed by cash inflows, which are then followed by cash outflows, giving the project multiple rates of return.

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

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 Internal rev rate makes NPV=0

Which of the following are weaknesses of the payback method?

-Cash flows received after the payback period are ignored. -The cutoff date is arbitrary. -Time value of money principles are ignored.

The three attributes of NPV are that it:

-uses all the cash flows of a project -discounts the cash flows properly -uses cash flows

NPV ____ cash flows properly

Discounts

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

MIRR NPV

Which of the following are mutually exclusive investments?

-A restaurant or gas station on the same piece of land -Two different choices for the assembly lines that will make the same product

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

The IRR rule can lead to bad decisions when _____ or _____. Multiple select question.

-Projects are mutually exclusive -Cash flows are not conventional

What are the advantages of the payback period method for management?

-The payback period method is easy to use -It allows lower level managers to make small decisions effectively -The payback period method is ideal for short projects

The payback period rule ______ a project if it has a payback period that is less than or equal to a particular cutoff date.

suggests accepting

The PI rule for an independent project is to ______ the project if the PI is greater than 1.

Accept

Capital ______ is the decision-making process for accepting and rejecting projects.

Budgeting

True or false: The MIRR function eliminates multiple IRRs and should replace NPV.

False NPV is more versatile and also eliminates multiple rates of return

The profitability index is calculated by dividing the PV of the _________ cash flows by the initial investment.

Future

Internal rate of return (IRR) must be compared to the ________ in order to determine the acceptability of a project.

Required Rate

One of the weaknesses of the payback period is that the cutoff date is a(n) ______ standard.

arbitrary

The amount of time needed for the cash flows from an investment to pay for its initial cost is the _____ period.

Payback

The profitability index will be bigger than one for a ___ NPV investment and less than one for a ___ NPV investment

Positive; Negative

Net ___ value is a measure of how much value is created or added today by undertaking an investment

Present

For a project with conventional cash flows, the NPV is ______ if the required return is less than the IRR, and it is ______ if the required return is greater than the IRR.

Positive; Negative

A situation in which taking one investment prevents the taking of another is called a mutually ___ investment decision

Exclusive

The present value of all cash flows (after the initial investment) is divided by the ______ to calculate the profitability index.

Initial investment

With nonconventional cash flows, there is a possibility that more than one discount rate will make the NPV of an investment zero. This is called the ____ rates of return problem.

Multiple

The IRR rule can lead to bad decisions when cash flows are _____ or projects are mutually exclusive.

Not conventional