Finance Ch. 8

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

A target average accounting return

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

Accept

A project should be ______ if its NPV is greater than zero

Accepted

The Average Accounting Return is defined as:

Average Net Income/Average Book Value

Which of the following is a disadvantage of the Profitability Index?

Cannot rank mutually exclusive projects

Which of the following is a disadvantage of the payback period rule?

Requires an arbitrary cutoff point

Which of the following are methods of calculating the MIRR of a project?

The Combination Approach, The Discounting Approach, and the Reinvestment Approach

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

The payback period can lead to foolish decisions if it is used too literally because:

it ignores cash flows after the cutoff date

One of the flaws of the payback period method is that cash flows after the cutoff date are ___

not considered in the analysis

The ___ is best suited for decisions on relatively small, minor projects while ___ is more appropriate for large complex projects

payback period; NPV

When calculating NPV, the present value of the nth cash flow is found by dividing the nth cash flow by 1 plus _____ rate raised to the nth power

the discount

The IRR is the rate that makes the NPV

equal 0

The profitability index is found as the present value of ___ cash flows divided by the initial investment

Future

According to Graham and Harvery's 1999 survey of 392 CFOs, which of the following two capital budgeting methods are widely used by firms in the US and Canada?

Internal Rate of Return and Net Present Value

Higher cash flows earlier in a project's life are __ valuable than higher cash flows later on

More

In capital budgeting, ___ determines the dollar value of a project to the company

Net Present Value

The ___ method evaluates a project by determining the time needed to recoup the initial investment

Payback

If the IRR is greater than the ______ _____, we should accept the project

Required Return

The internal rate of return is a function of ____

a project's cash flows