ch 9
When cash flows are conventional, NPV is ____.
-equal to zero when the discount rate equals the IRR -negative for disc rate above IRR -positive for discount rates below the IRR
discounted payback period has which of these weaknesses?
-exclusion of some cash flows -arbitrary cutoff date -loss of simplicity as compared to the payback method
The basic NPV investment rule is:
-reject a project if its NPV is less than zero -accept a project if the NPV is >0 -if the NPV is =0, acceptance or rejection of the project is a matter of indifference
weaknesses of payback method
-time value of money principle are ignored -cash flows received after the payback period are ignored -the cutoff date is arbitrary
true / 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
If a project has multiple internal rates of return, which of the following methods should be used?
-MRR -NPV
The IRR rule can lead to bad decisions when ___________ or _____________.
-cash flows are not conventional -projects mutually exclusive
3 attributed of NPV are that it:
-discount the cash flows properly -uses cash flows -uses all the cash flows of a project
what is the IRR for a project w an initial investments of 250$ & subsequent cash inflows of 100$ per year for 3 years
9.70%
spreadsheet function for calculating net present value is _____________
NPV( CF1,...,CFn) + CFO
what is the NPV of a project w an initial investment of $95, a cash flow in one year of 107, & disc rate of 6%
NPV: -$95+(107/1.06)=$5.94
payback period tells the time it takes to break even in an _____ sense. Discounted payback period tells the time it takes to breakeven in an ________ or financial sense.
accounting, economic
Capital ____ is the decision-making process for accepting and rejecting projects.
budgeting
which capital budgeting decision method finds the present value of each cash flow b4 calculating a payback period
discounted payback period
true / false: the MIRR function eliminates multiple IRRs & should replace NPV
false
profitability index is calculated by dividing the PV of the _____ cash flows by the initial investments
future
IRR continues to be very popular in practice, partly bc:
gives a rate of return rather than a dollar value
The present value of all cash flows after the intitial investments is is divided by the _____ to calculate the profitability index.
initial investments
by ignoring time value, the payback period rule may accept projects with a ________ ( positive or negative) NPV
negative
the capital budgeting method allows lower management to make smaller, everyday financial decisions effectively.
payback method
the amount of time needed for cash flows from an investment to pay for its initial cost is the
payback period
capital budgeting, the net ______ determines the value of a project to the company
present value
If the IRR is > than the _______ ___________, we should accept the project.
required return
scenario would IRR always recommend the wrong decision?
starting cash flow: 1000 ending cash flow: -2000
The point at which the NPV profile crosses the vertical axis is the:
sum of cash flows of the project
true / false: the crossover rate is the rate at which the NPVs of two projects are equal
true
true/false : IRR approach may lead to incorrect decisions in comparison of two mutually inclusive projects
true
IRR is the discount rate that makes the NPV of a project equal to _________
zero