Chapter 9

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

projects are mutually exclusive cash flows are not conventional

Arrange the steps involved in the discounted payback period in order starting with the first step.

1. discount cashflows 2. add discounted CF 3. Accept if discounted payback is less than some prespecified number off years

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

NPV MIRR

By ignoring time value, the payback period rule may incorrectly accept projects with a _______ (positive/negative) NPV.

negative

A project should be __________ if its NPV is greater than zero.

accepted

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

payback

In capital budgeting, the net ______ determines the value of a project to the company.

present value

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

not considered in the analysis

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

present

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

Which of the following are weaknesses of the payback method?

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

Which capital budgeting decision method finds the present value of each cash flow before calculating a payback period?

Discounted payback period

This capital budgeting method allows lower management to make smaller, everyday financial decisions effectively.

Payback method

According to Graham and Harvey's 1999 survey of 392 CFOs, in addition to IRR and NPV, which were the two most widely used techniques, over half of the respondents always, or almost always, used which of the following methods?

Payback method

The AAR is calculated by taking the average net income and dividing it by the average ____ value.

book

_____ budgeting is the decision-making process for accepting and rejecting projects.

Capital

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

False

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

future

The basic NPV investment rule is:

if the NPV is equal to zero, acceptance or rejection of the project is a matter of indifference reject a project if its NPV is less than zero. accept a project if the NPV is greater than zero.

The payback period method allows lower management to make ____ (smaller/larger), everyday financial decisions effectively.

smaller

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

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

According to Graham and Harvey's 1999 survey of 392 CFOs, which of the following two capital budgeting methods are most used by firms in the United States?

Internal rate of return Net present value

Using the payback period rule will bias toward accepting which type of investment?

Short-term investment

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

a target average accounting return

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

budgeting

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

initial investment

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

not conventional

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