Chapter 8

Question 1

Net Present Value

Answer 1

the basic idea with NPV is that the benefit from an investment outweighs the cost of the investment

Question 2

Estimating NPV

Answer 2

managers often use Discount Cash Flow Valuation to determine future cash flows of an investment at times

Question 3

Playback Rule

Answer 3

an investment is acceptable if its calculated payback period is less than some predefined number of years

Question 4

Payback Period

Answer 4

the amount of time required for an investment to generate cash flows to recover its initial cost

Question 5

Average Accounting Return

Answer 5

Average net income/average book value

Question 6

Internal Rate of Return

Answer 6

IRR- the discount rate that makes the NPV of an investment zero

Question 7

Advantages of the IRR

Answer 7

• closely related to NPV, often leading to similar decisions
• easy to understand and communicate

Question 8

Disadvantages of the IRR

Answer 8

• may result in multiple answers with nonconventional cash flows
• may lead to incorrect decisions in comparison of mutually exclusive investments

Question 9

Profitable Index

Answer 9

tool used to evaluate the potential profitability of a project

Question 10

Profitability Index vs. NPV

Answer 10

profitability Index measures and focuses on value creation