finance smartbook chapter 8

A(n) ______ project does not rely on the acceptance or rejection of another project. Multiple choice question. mutually exclusive co-dependent independent dependent

independent

How does the timing and the size of cash flows affect the payback method? Assume the project does pay back within the project's lifetime. Multiple choice question. A delay in receiving the cash inflows will decrease the payback period. An increase in the size of the first cash inflow will decrease the payback period, all else held constant. Receiving every cash inflow sooner will increase the payback period, all else held constant. The timing but not the size of the cash flows affects the payback period.

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

In general, NPV is ___. Multiple select question. negative for discount rates above the IRR positive for discount rates below the IRR equal to zero when the discount rate equals the IRR positive for discount rates above the IRR

-negative for discount rates above the IRR -equal to zero when the discount rate equals the IRR -positive for discount rates below the IRR

According to the average accounting return rule, a project is acceptable if its average accounting return exceeds: Multiple choice question. the required rate of return a target average accounting return the internal rate of return the net present value

a target average accounting return

The profitability index is calculated by dividing the PV of the _________ cash inflows by the initial investment. Multiple choice question. positive previous future

future

Which of the following are weaknesses of the payback method? Multiple select question. The cutoff date is arbitrary. All cash flows are included in the payback period. Cash flows received after the payback period are ignored. Time value of money principles are ignored.

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

According to Graham and Harvey's 1999 survey of 392 CFOs (published in 2001), which of the following two capital budgeting methods are widely used by firms in the US and Canada? Multiple select question. payback method internal rate of return accounting rate of return net present value profitability index

net present value internal rate of return

True or false: 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

True or false: The profitability index (PI) is calculated by dividing the present value of an investment's future cash flows by its future cost.

False. The profitability index (PI) is calculated by dividing the present value of an investment's future cash flows by its initial cost.

Which of the following present problems when using the IRR method? Multiple select question. larger cash flows later in the project non-conventional cash flows mutually exclusive projects a high discount rate

- non-conventional cash flows - mutually exclusive projects

One of the flaws of the payback period method is that cash flows after the cutoff date are ___. Multiple choice question. not considered in the analysis reserved for future projects given greater value given special consideration

-not considered in the analysis

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 _______________. Multiple choice question. independent inter-dependent co-dependent mutually exclusive

mutually exclusive

True or false: A disadvantage of the AAR is that it does not take into account the time value of money.

true

True or false: According to Graham and Harvey's 1999 survey of 392 CFOs (published in 2001), the internal rate of return and the NPV are the two most popular capital budgeting methods used by firms in the US and Canada.

true

The PI rule for an independent project is to ______ the project if the PI is greater than 1. Multiple choice question. reject accept delay

accept

Based on the average accounting return rule, a project is _____ if its average accounting return exceeds a target average accounting return. Multiple choice question. rejected acceptable break-even blue-chip

acceptable

The Profitability Index is also called the __________ ratio. Multiple choice question. cost-benefit investment-benefit cost-cashflow cost-investment

cost-benefit

True or false: The PI always results in the correct decision in comparisons of mutually exclusive investments. True false question. True False

false

True or false: The profitability index rule for an independent project states that, if a project has a positive NPV, then the present value of the future cash flows must be smaller than the initial investment.

false

True or false: The IRR is easy to use because you only need to know the appropriate discount rate.

false, You need the discount rate to calculate the NPV but it is not required for the IRR calculation.

The profitability index (PI) is calculated by dividing the present value of an investment's future cash flows by its _____ _____. Multiple choice question. interest rate discount rate coupon rate initial cost

initial cost

Which of the following are reasons why IRR continues to be used in practice? Multiple select question. Businesspeople prefer to talk about rates of return. It is easier to communicate information about a proposal with an IRR. The IRR of a proposal can be calculated without knowing the appropriate discount rate. The IRR allows the correct ranking of projects.

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

Which of the following are methods of calculating the MIRR of a project? Multiple select question. The Present Value Approach The Combination Approach The Reinvestment Approach The Discounting Approach

- The Reinvestment Approach - The Discounting Approach - The Combination Approach

The Combination MIRR method is used by the Excel MIRR function and uses which of the following? Multiple select question. Discounting ALL cash inflows to time 0 A financing rate for discounting Compounding ALL cash flows to the end of the project A reinvestment rate for compounding Compounding cash inflows to the end of the project A single discount rate for both discounting and compounding Discounting all cash outflows to time 0

A financing rate for discounting A reinvestment rate for compounding Compounding cash inflows to the end of the project Discounting all cash outflows to time 0

If a project has multiple internal rates of return, which of the following methods should be used? Multiple select question. MIRR IRR NPV

NPV MIRR

True or false: A project with non-conventional cash flows will produce two or more IRRs.

True(An IRR will result for every change in sign in the cash flow stream)

The NPV is ______ if the required return is less than the IRR, and it is ______ if the required return is greater than the IRR. Multiple choice question. negative, negative positive, positive positive, negative negative, positive

positive, negative

According to the basic IRR rule, we should: Multiple choice question. reject a project if the IRR is greater than the required return reject a project if the IRR is less than the required return accept the project if the IRR is less than the required return reject a project if the IRR is less than 10%

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

If the IRR is greater than the _______ ________, we should accept the project. Multiple choice question. required return inflation rate tax rate payback period

required return

True or false: An advantage of the AAR is that it is based on book values, not market values.

false

True or false: There is only one way to calculate the modified IRR.

false

Which of the following is a disadvantage of the Profitability Index? Multiple choice question. It is useful when capital is rationed. It cannot rank mutually exclusive projects. It is closely related to NPV. It is easy to understand.

it cannot rank mutually exclusive projects

Internal rate of return (IRR) must be compared to the ________ in order to determine the acceptability of a project. Multiple choice question. required return federal funds rate inflation rate

required return

The multiple rates of return problem is the possibility that more than one discount rate may make the net present value of an investment equal to____

zero

In general, NPV is ___. Multiple select question. negative for discount rates above the IRR positive for discount rates below the IRR positive for discount rates above the IRR equal to zero when the discount rate equals the IRR

• Equal to zero when the discount rate equals the IRR • Positive for discount rates below the IRR • Negative for discount rates above the IRR