chapter 7

Question 1

NPV profile

Answer 1

a graph of the project’s NPV over a range of discount rates.

Question 2

IRR investment rule

Answer 2

take any investment opportunity where the IRR exceeds the opportunity cost of capital. turn down any opportunity whose IRR is less than the opportunity cost of capital.

Question 3

delayed investments

Question 4

payback investment rule

Answer 4

states that you should only accept a project if its cash flows pay back its initial investment within a prespecified period. it is usually used for small investment decisions.

Question 5

payback period

Answer 5

the time it takes to pay back the initial investment.

Question 6

profitability index

Answer 6

used to identify the optimal combination of projects given a resource constraint. it measures the value created in terms of NPV per unit of resource consumed.

Question 7

cutoff period

Answer 7

the pre-specified length of time of the payback period.

Question 8

Return on Capital Employed (ROCE)/Accounting Rate of Return

Answer 8

an investment measure that is the accounting profit calculated with the average annual accounting profit divided by average investment.

Question 9

mutually exclusive projects

Answer 9

choosing a maximum of one project among several possible projects.

Question 10

Internal Rate of Return (IRR)

Answer 10

the rate of return where the NPV of the investment is equal to zero.