Chapter 8 review business finance
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
which of the following presents a problem when using the IRR method?
mutually exclusive projects & non conventional cash flows
If a project has multiple internal rates of return, which of the following methods should be used?
npv & mirr
the ____method evaluates a project by determining the time needed to recoup the initial investment
payback
the npv is _____ if the required return is less than the IRR and it is _______if required return is greater than the IRR
pos, neg
when calculating the npv the present value of the nnth cash flow is found by dividing the nth cash flow by 1 plus ______rate raised to the nth power
the discount
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?
the excel npv function is actually a pv function the range of cash flow specified in excel begins with cash flow #1 not cash flow 0 the discount rate in excel is entered as a decimal or as a percentage with a parent sign
the internal Rate of Return is a function of
a project's cash flows
the pi rule for an independent project is to _______The project if pi is greater than 1
accept
a project should be_____if npv is greater than zero
accepted
how does timing and the size of cash flows affect the payback method? assume the project does pay back within the projects lifetime
an increase in the size of the first cash inflow will decrease the payback period all else held constant
the average accouting return is defined as
avg Ni/ avg book value
which of the following is a disadvantage of the PI
cannot rank mutually exclusive projects
which of the following are weaknesses of the payback method
cash flows received after the payback are ignored the cutoff date is arbitrary time value of money principles are ignored
the combination mirr method is used by the excel mirr function and uses which of the following ?
compounding cash inflows to the end of the project a reinvestment rate for compounding a financing rate for discounting discounting all cash inflows to time zero
an advantage of the aar is that it is based on book values not market values
false
the profitability index is calculated by dividing the PV of the ____cash inflows by the initial investment
future
the present value of the future cash flows are divided by the____to calculate the profitability index
initial investment
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
which of the following are reasons why irr continues to be used in practice
it is easier to communicate information about a proposal with an IRR the IRR of an proposal can be calculated without knowing the appropiate disount rate business people prefer to talk about rates of returns
what is the irr of a project with an initial investment of 250 and subsequent cash inflows of 100 per year for 3 years
9.7 %
mutually exclusive
Events that cannot occur at the same time.
in capital budgeting ___determines the dollar value of a project to the company
NPV
according to the basic IRR rule we should
reject a project if the IRR is less than the required return
which of the following are methods of calculating the MIRR of a project
the combination, discounting & reinvestment approach
According to the average accounting return rule, a project is acceptable if its average accounting return exceeds:
a target average accounting return
