Capital Budgeting

Question 1

The required rate of return is often termed the _________, the rate that a project’s IRR must exceed for the project to be accepted.

Answer 1

hurdle rate

Question 2

The ________ payback period is the number of years it takes for the cumulative
discounted cash flows from a project to equal the original investment

Answer 2

discounted

Question 3

AAR =

Answer 3

Average net income / average book value

Question 4

Profitability index (PI) =

Answer 4

PV of cash flows / initial investment = 1 + NPV/initial investment

Question 5

Whenever the NPV and IRR rank two mutually exclusive projects differently, as
they do in the example above, you should choose the project based on _______.

Answer 5

the NPV