Chap 7 NPV Flashcards
Why is a dollar received today worth more than a dollar received in the future?
Today’s dollar can be invested, yielding a greater amount in the future
According to the basic investment rule for NPV, a firm should ___.
- -accept a project if the NPV is greater than zero
- -reject a project if NPV is less than zero
- -be indifferent towards accepting a project if NPV is equal to zero.
THE IRR allows a manager to summarize the information about a project in a ___ rate of return.
single
What is the PI for a project with an initial cash outflow of $30 and subsequent cash inflows of $80 in Y1 and $20 Y2 if the dicount rate is 12%?
2.91
In general, NPV is___.
- negative for discount rates above the IRR.
- equal to zero when the discount rate equals the IRR
- positive for discount rates below the IRR
The discount rate is often referred to as ___.
an opportunity cost.
Arrange the steps involved in the discounted payback period in order starting with the first step.
- Discount the cash flows using the discount rate.
- Add the discounted cash flows.
- Accept if the discounted payback period is less than some pre-specified number of years.
What is NPV of a project with an initial investment of $95, a cash flow in one year of $107, and a discount rate of 6%?
5.94
Accept a project if its NPV is ___ zero.
greater than
What does value additivity mean for a firm?
- The value of a firm is simply the combined value of a firm’s projects, divisions, and entities owned by the firm.
- The NPV values of individual projects can be added together.
The incremental IRR is used to account for the problem of ___ when evaluating project cash flows.
scale
The three attributes of NPV are that it:
- uses cash flows.
- discounts the cash flow properly
- uses all the cash flows of a project
Which of these are weaknesses of the AAR method of project analysis?
- arbitrary target rate
- use of accounting values rather than cash flows
- no account of timing
According to the basic IRR rule, we should ___ a project if the IRR is ___ than the discount rate.
- reject; less
- accept; greater
Internal rate of return (IRR) must be compared to the __ rate in order to determine the acceptability of a project.
discount
A firm evaluating two mutually exclusive projects can __.
- reject both projects
- reject one of the projects
- accept one of the projects
Accepting a positive NPV project will __ the stockholders by __ the value of the firm.
benefit; increasing
Capital rationing requires a company to ___.
limit their investments
What is the IRR for a project with an initial investment of $250 and subsequent cash inflows of $100 per year for 3 years?
9.70%
A project requires $240 of equipment that will be depreciated straight-line over the 3-year project life. What is the average investment for AAR purposes??
($240+160+80+0)/4=$120
NPV___ cash flows properly.
discounts
When cash flows are conventional, NPV is ___ if the discount rate is above the IRR.
negative
The decision rule for a project for which the first cash flow is an inflow and subsequent cash flows are negative states that we should __ the project when the IRR is ___ than the discount rate.
- accept; less
- reject; greater
Which of the following are weaknesses of the payback method?
- time value of money principles are ignored
- cash flows received after the payback period are ignored
- the cutoff date is arbitrary