Chapter 11

Question 1

4 Weaknesses of the IRR

Answer 1

1. Additivity
2. Negativity (Sign changes)
3. Order of Cash flows
4. Size Bias (project size)

Question 2

AARR

1. Equation?
2. What it stands for?
3. When do you accept it?

Answer 2

Average Net Income / Average Book Value Assets

Average Accounting Rate of Return

Accept when > ROA

Question 3

The Golden Decision Maker

Answer 3

NPV

Question 4

NPV Good or Bad?

Answer 4

Good > 0

Benefits > Costs

Question 5

The process of valuing an investment by determining the present value of its future cash flows is called (the):

Answer 5

b. discounted cash flow valuation.

Question 6

Which one of the following statements concerning net present value (NPV) is correct?

Answer 6

An investment should be accepted if the NPV is positive and rejected if it is negative.

Question 7

Which one of the following statements is correct concerning the payback period?

Answer 7

An investment is acceptable if its calculated payback period is less than some pre-specified period of time.

Question 8

MIRR

Answer 8

Reinvestment rate is different than the IRR. It is Modified to be more accurate. Re-investment rate will not be as high as the IRR.

Question 9

An investment is acceptable if its IRR:

Answer 9

exceeds the required return.

Question 10

The possibility that more than one discount rate will make the NPV of an investment equal to zero is called the _____ problem.

Answer 10

multiple rates of return

Question 11

The primary reason that company projects with positive net present values are considered acceptable is that:

Answer 11

they create value for the owners of the firm.

Question 12

Payback is frequently used to analyze independent projects because:

Answer 12

the cost of the analysis is less than the potential loss from a faulty decision.

Question 13

What is the net present value of a project with the following cash flows and a required
return of 12 percent?

					Year	Cash Flow
					   0	 -$28,900
					   1	  $12,450
					   2	  $19,630
					   3	  $  2,750

Answer 13

-$177.62

Question 14

An investment has the following cash flows. Should the project be accepted if it has been assigned a required return of 9.5 percent? Why or why not?

				Year		Cash Flow
				   0		-$24,000
				   1		 $  8,000
				   2		 $12,000
				   3		 $  9,000

Answer 14

yes; because the IRR exceeds the required return by about 0.39 percent

Question 15

A project has an initial cost of $1,900. The cash inflows are $0, $500, $900, and $700 over the next four years, respectively. What is the payback period?

Answer 15

d. 3.71 years

Question 16

What are the 3 criteria for a good investment?

Answer 16

1. Time Value of Money
2. Objective Decision Rule/Required Rate of Return
3. Consider all of the Cash flows

Question 17

What is Capital Budgeting?

Answer 17

Capital budgeting is the process of evaluating and planning for purchases of long-term assets.

Question 18

the most preferred evaluation technique

Answer 18

net present value

Question 19

What is the net present value of the following stream of cash flows if the discount rate is 11%?

(21,400,000)

7,800,000

8,100,000

7,100,000

6,400,000

Answer 19

$1.6 million

Question 20

The decision rule for using the NPV states that when the NPV is greater than ______________ the project should be accepted.

Answer 20

Zero

Question 21

The advantages to using the NPV when evaluating a capital investment project

Answer 21

.