FIN 362-SMRT BK 9

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

future

The point at which the NPV profile crosses the horizontal axis is the:

internal rate of return

The discounted payback period has which of these weaknesses?

Arbitrary cutoff date Exclusion of some cash flows Loss of simplicity as compared to the payback method

The rate is the rate at which the NPVs of two projects are equal.

Blank 1: crossover

Based on the payback rule, an investment is acceptable if its payback is less than some prespecified number of years.

Blank 1: discounted Blank 2: discounted

An independent project (does/doesn't) rely on the acceptance or rejection of another project.

Blank 1: doesn't

The AAR (does/doesn't) incorporate time value of money.

Blank 1: doesn't

The discounted payback is the time it takes to break even in an or financial sense.

Blank 1: economic

Which of the following is true about certificates of deposit (CDs)?

There are active markets in CDs with maturities of 3, 6, 9, and 12 months.

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

a target average accounting return

If cash levels are too low, a firm will _____.

run out of cash too often

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

The point at which the NPV profile crosses the vertical axis is the:

sum of the cash flows of the project

The three attributes of NPV are that it:

uses all the cash flows of a project. uses cash flows. discounts the cash flows properly.

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

The IRR is the discount rate that makes the NPV of a project equal to ______.

zero

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

Blank 1: smaller

Which of the following are types of money market securities?

Certificates of deposit U.S. T-bills

True or false: It is not a good strategy to carry temporary cash surpluses because cash does not generate any return.

False

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

False

True or false: There is an active secondary market for commercial paper.

False

Which of the following is not an additional consideration in regards to cash management?

For large firms, trading costs of buying/selling securities are high compared to opportunity costs of holding cash.

Which of the following are true about commercial paper?

It has no especially active secondary market. Its marketability can be low.

Which of the following is true about commercial paper?

It is unsecured.

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

MIRR NPV

True or 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

Money market securities generally have _____.

a low default risk

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

budgeting

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

not conventional

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

present value

A straightforward model that is useful for illustrating the factors in cash management and current asset management is the _____ model.

BAT

Determining the firm's target cash balance involves a trade-off between the carrying costs and the shortage costs, which are also called the costs.

Blank 1: adjustments or adjustment

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

Short-term investment

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 the PI is greater than 1.

accept

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

accepted

The change in value of securities due to changes in interest rates is known as _____ risk.

interest rate

The increased change in value that occurs because longer maturity investments are affected more by interest rate changes than are shorter maturity investments is called _____ risk.

interest rate

The Miller-Orr model assumes that the cash balances fluctuate randomly and that the average change is .

Blank 1: zero, 0, nothing, or nil

What considerations does borrowing cash introduce?

The probability that borrowing is more expensive than selling marketable securities Borrowing will depend on management's desire to hold low cash balances.

True or false: Based on the discounted payback rule, an investment is acceptable if its discounted payback is less than some prespecified number of years.

True

The payback period can lead to incorrect decisions if it is used too literally because it ____.

ignores cash flows after the cutoff date

Based on the average return rule, a project is acceptable if its average return exceeds a target average return.

Blank 1: accounting Blank 2: accounting Blank 3: accounting

Trading costs (fall/rise) as the cash balance grows.

Blank 1: fall

With nonconventional cash flows, there is a possibility that more than one discount rate will make the NPV of an investment zero. This is called the rates of return problem.

Blank 1: multiple

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

Blank 1: negative

The spreadsheet NPV function actually calculates present value, not present value, as the name suggests.

Blank 1: net

A(n) (decrease/increase) in the size of the first cash inflow will decrease the payback period, all else held constant.

Blank 1: increase

The IRR can lead to the wrong decision when cash (inflows/outflows) occur before cash (inflows/outflows).

Blank 1: inflows Blank 2: outflows

The profitability index will be bigger than one for a (negative/positive) NPV investment and less than one for a (negative/positive) NPV investment.

Blank 1: positive Blank 2: negative

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

Blank 1: present

Based on the average accounting return rule, a project is acceptable if its average accounting return exceeds a average accounting return.

Blank 1: target or goal

NPV ______ cash flows properly.

discounts

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

Blank 1: book

A situation in which taking one investment prevents the taking of another is called a mutually investment decision.

Blank 1: exclusive

For both the BAT and Miller-Orr models, all else being equal, the greater the interest rate, the _____.

lower the target cash balance

Internal rate of return (IRR) must be compared to the ________ in order to determine the acceptability of a project.

required return

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

Discounted payback period

Which of the following are advantage(s) of AAR?

Needed information is usually available. Is easy to compute.

Which of the following is not an implication of the BAT and Miller-Orr models?

The greater the order cost, the lower the target cash balance.

Which of the following are true with regard to the sale of U.S. Treasury bills?

They are sold weekly. They are sold by auction.

Which of the following are true about U.S. Treasury bills?

They mature in 30, 90, or 180 days. They are obligations of the U.S. government.

Which of the following are mutually exclusive investments?

Two different choices for the assembly lines that will make the same product. A restaurant or a gas station on the same piece of land.

Payback period tells the time it takes to break even in an ____ sense. Discounted payback period tells the time it takes to break even in an ______ or financial sense.

accounting; economic

One of the weaknesses of the payback period is that the cutoff date is a(n) ______ standard.

arbitrary

One of the main disadvantages of the discounted payback period rule is that the cutoff is arbitrarily set and cash flows beyond that point are:

ignored.

A(n) ______ project does not rely on the acceptance or rejection of another project.

independent

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

initial investment

Certificates of deposits in excess of $100,000 are called ______ CDs.

jumbo

The spreadsheet function for calculating net present value is ____.

=NPV()

Two of the most important reasons firms have temporary cash surpluses are _____.

seasonal firm activities financing of planned expenditures

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

1. Discount the cash flows using the discount rate 2. Add the discounted cash flows 3. Accept if the discounted payback period is less than some pre-specified number of years

To avoid interest rate risk, firms often limit their investment maturities to ______ days.

90

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

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

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

Blank 1: Capital

The ______ model assumes that the cash balances fluctuate randomly and that the average change is zero.

Miller-Orr

BAT in the BAT model stands for _____.

Baumol-Allais-Tobin

The basic NPV investment rule is:

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

The target cash balance trades off the __________ cost of holding too much cash with the costs of holding too little cash.

opportunity

The ____________ method differs from NPV because it evaluates a project by determining the time needed to recoup the initial investment.

payback

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

payback

Firms may accumulate temporary investments in marketable securities for _____.

plant construction programs dividend payments

For a project with conventional cash flows, the NPV is ______ if the required return is less than the IRR, and it is ______ if the required return is greater than the IRR.

positive, negative

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

projects are mutually exclusive cash flows are not conventional

According to the basic IRR rule, we should _____.

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

If the IRR is greater than the _______ ________, we should accept the project.

required return

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

Payback method

In which of the following scenarios would IRR always recommend the wrong decision?

Starting cash flow: 1000 Ending cash flow: -2000

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.

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