Chapter 10

Question 1

The process of decision making with respect to investments made in fixed assets, that is should a project be accepted or rejected

Answer 1

Capital Budgeting

Question 2

The number of years it takes to recapture a project’s initial outlay

Answer 2

Payback Period

Question 3

The number of years it takes to recapture a project’s initial outlay from the discounted free cash flows

Answer 3

Discounted Payback Period

Question 4

The present value of an investment’s annual free cash flows less the investment’s initial outlay

Answer 4

Net Present Value (NPV)

Question 5

The ratio of the present value of an investment’s future free cash flows to the investment’s initial outlay

Answer 5

Probability Index (PI)

Question 6

The rate of return that the project earns

Answer 6

Internal Rate of Return (IRR)

Question 7

A graph showing how a projects NPV changes as the discount rate changes

Answer 7

Net Present Value Profile

Question 8

The discount rate that equates the present value of the project’s future free cash flows with the terminal value of the cash inflows

Answer 8

Modified Internal Rate of Return (MIRR)

Question 9

Placing a limit on the dollar size of the capital budget

Answer 9

Capital Rationing