Chapter 8: Net Present Value and Other Investment Criteria

Question 1

opportunity cost of capital

Answer 1

expected rate of return given up by investing in a project

Question 2

net present value (NPV)

Answer 2

present value of cash flows minus initial investment

Question 3

mutually exclusive projects

Answer 3

two or more projects that cannot be pursued simultaneously

Question 4

payback period

Answer 4

time until cash flows recover the initial investment of the project

Question 5

discounted payback period

Answer 5

the time until discounted cash flows recover the initial investment in the project

Question 6

internal rate of return (IRR)

Answer 6

the discount rate at which a project NPV=0

Question 7

equivalent annual cost

Answer 7

the cost per period with the same present value as the cost of buying and operating a machine

Question 8

capital rationing

Answer 8

limit set on the amount of funds available for investment

Question 9

profitability index

Answer 9

ratio of net present value to initial investment