Finance Chapter 9 Connect
The IRR rule can lead to bad decisions when
-Cash flows are not conventional -Projects are mutually exclusive
If a project has multiple internal rates of return, which of the following methods should be used?
-MIRR -NPV
When Cash Flows are Conventional the NPV is
-Negative for discounted rates above the IRR -Positive for discount rates above the IRR -Equal to zero for the discount rates equal to the IRR.
The discount payback period has which weaknesses
-arbitrary cutoff date -loss of simplicity as compared to the payback method -exclusion of some cash flows
Which of the following are advantages of AAR
-easy to compute -needed information is always available
what are the advantages of the payback period for management?
-it allows lower level management to make decisions effectively. -the payback method is easy to use -It is ideal for short projects
Which of the following are weaknesses of the payback period?
-the cutoff date is arbitrary -cashflows received after the payback period are ignored. -time value of money principles are ignored.
Which of the following are mutually exclusive events?
-two different choices for the assembly lines that will make the same product -a restaurant or gas station on the same piece of land
the three attributes of NPV are
-uses cash flows -discounts the cash flows properly -uses all the cash flows of a project
average accounting return
=some measure of average accounting profit/some measure of average accounting value =Average net income/ Average book value
The Steps involved in the discounted payback period in order started with the first step
Discount the cash flows using the discount rate. Add the discounted Cash Flows Accept if the discounted period is less than a specified number of periods.
The Present Value of all Cash Flows (after the initial investment) is divided by the ----- to calculate the profitability index.
Initial Investment
this capital budgeting method allows lower management to make smaller, everyday financial decisions effectively
Payback method
The three attributes of NPV are that it
Uses cash flows uses all cash flows of a project discounts the cash flows properly
The PI rule for an independent project is to ________ the project if PI is greater than 1
accept
capital ------- is the decision making process for accepting and rejecting projects
budgeting
True or false: the MIRR function eliminates multiple IRRs and should replace NPV
false
the profitability index is calculated by dividing the ------ (cash flows) values by the initial investment
future
The point at which the npv profile crosses the horizontal axis is the
internal rate of return
When cash flows are conventional, the npv is ---- to the discount rate is above the irr.
negative
amount of time needed for the cash flow from an investment to pay for its initial cost
payback period
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
In capital budgeting, the net -------- determines the value of the company to the project
present value
If IRR is greater than the ________ ____________ we should accept the project
required return
The point at which the npv profile crosses the vertical axis is the
sum of the cash flows of the project
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
the crossover rate is the rate at which the NPVs of two projects are equal
true
considering project whose internal rate of return is 14%. If required rate of return in 14 percent the projects NPV is
zero