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Finance > Chapter 9 SmartBook > Flashcards

Chapter 9 SmartBook Flashcards

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1
Q

Net ______ value is a measure of how much value is created or added today by undertaking an investment.

A

present

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2
Q

______ budgeting is the decision-making process for accepting and rejecting projects.

A

capital

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3
Q

A project should be __________ if its NPV is greater than zero.

A

accepted

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4
Q

The three attributes of NPV are that it:

A. uses cash flows.

B. doesn’t rely on a discount rate.

C. uses all the cash flows of a project.

D. discounts the cash flows properly.

A

A, C and D

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5
Q

The spreadsheet function for calculating net present value is ____.

A

=NPV()

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6
Q

The amount of time needed for the cash flows from an investment to pay for its initial cost is the _____ period.

A

payback

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7
Q

In capital budgeting, the net ______ determines the value of a project to the company.

A

present value

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8
Q

How does the timing and the size of cash flows affect the payback method? Assume the project does pay back within the project’s lifetime.

A

An increase in the size of the first cash inflow will decrease the payback period, all else held constant.

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9
Q

The basic NPV investment rule is:

A. if the NPV is equal to zero, acceptance or rejection of the project is a matter of indifference

B. accept a project if the NPV is greater than zero.

C. accept a project if the discount rate is above zero.

D. reject a project if its NPV is less than zero.

E. accept a project if the NPV is less than zero.

A

A, B and D

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10
Q

By ignoring time value, the payback period rule may incorrectly accept projects with a ______
(positive/negative) NPV.

A

negative

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11
Q

NPV ______ cash flows properly.

A

discounts

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12
Q

The payback period method allows lower management to make ______
(smaller/larger), everyday financial decisions effectively.

A

smaller

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13
Q

The spreadsheet NPV function actually calculates present value, not ______ present value, as the name suggests.

A

net

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14
Q

What are the advantages of the payback period method for management?

A. The payback period method is easy to use.

B. The payback period method is ideal for short projects.

C. The payback period adjusts for the discount rate.

D. It allows lower level managers to make small decisions effectively.

A

A, B and D

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15
Q

The payback period rule ______ a project if it has a payback period that is less than or equal to a particular cutoff date.

A

suggests accepting

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16
Q

Arrange the steps involved in the discounted payback period in order starting with the first step.

A. Accept if the discounted payback period is less than some prespecified number of years. incorrect toggle button unavailable

B. Add the discounted cash flows. correct toggle button unavailable

C. Discount the cash flows using the discount rate. incorrect toggle button unavailable

A
  1. = C
  2. = B
  3. = A
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17
Q

Fill in the Blank Question
Fill in the blank question.
A(n) _____ (decrease/increase) in the size of the first cash inflow will decrease the payback period, all else held constant.

A

increase

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18
Q

Based on the discounted payback rule, an investment is acceptable if its discounted payback is less than some prespecified number of years.

True false question.

A

T

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19
Q

Using the payback period rule will bias toward accepting which type of investment?

A

Short-term investment

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20
Q

The discounted payback is the time it takes to break even in an _______
or financial sense.

A

economic

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21
Q

This capital budgeting method allows lower management to make smaller, everyday financial decisions effectively.

A

Payback method

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22
Q

One of the main disadvantages of the discounted payback period rule is that the cutoff is arbitrarily set and cash flows beyond that point are:

A

ignored.

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23
Q

Which of the following are weaknesses of the payback method?

A. Time value of money principles are ignored.

B. Cash flows received after the payback period are ignored.

C. All cash flows are included in the payback period.

D. The cutoff date is arbitrary.

A

A, B and D

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24
Q

The AAR is calculated by taking the average net income and dividing it by the average _______ value.

A

book

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25
Q

Which capital budgeting decision method finds the present value of each cash flow before calculating a payback period?

A

Discounted payback period

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26
Q

Based on the ______ payback rule, an investment is acceptable if its ______
payback is less than some prespecified number of years.

A

discounted

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27
Q

Based on the average accounting return rule, a project is acceptable if its average accounting return exceeds a ________ average accounting return.

A

target

28
Q

The discounted payback period has which of these weaknesses?

A. Arbitrary cutoff date

B. Exclusion of some cash flows

C. Lack of a decision rule

D. Loss of simplicity as compared to the payback method

A

A, B and D

29
Q

According to the average accounting return rule, a project is acceptable if its average accounting return exceeds:

A

a target average accounting return

30
Q

Which of the following are advantage(s) of AAR?

A. Is easy to compute.

B. Incorporates time value of money

C. Has an objective benchmark

D. Relies on cash flows, rather than accounting values.

E. Needed information is usually available.

A

A and E

31
Q

Capital Corp is considering a project whose internal rate of return is 14%. If Capital’s required return is 14%, the project’s NPV is:

A

0

32
Q

Based on the discounted payback rule, an investment is acceptable if its discounted payback is less than some prespecified number of years.

True false question.

A

T

33
Q

If the IRR is greater than the _______ ________, we should accept the project.

A

required return

34
Q

Based on the average _____
return rule, a project is acceptable if its average _______ return exceeds a target average _______ return.

A

accounting

35
Q

The internal rate of return is a function of ____.

A

a project’s cash flows

36
Q

One of the main disadvantages of the discounted payback period rule is that the cutoff is arbitrarily set and cash flows beyond that point are:

A

ignored.

37
Q

The point at which the NPV profile crosses the horizontal axis is the:

A

internal rate of return

38
Q

The AAR ______
(does/doesn’t) incorporate time value of money.

A

doesn’t

39
Q

An independent project ______
(does/doesn’t) rely on the acceptance or rejection of another project.

A

doesn’t

40
Q

The IRR rule can lead to bad decisions when _____ or _____.

cash flows are not conventional

NPV is positive

payback period is less than two years.

projects are mutually exclusive

A

A and D

41
Q

According to the basic IRR rule, we should _____.

A

reject a project if the IRR is less than the required return

42
Q

The IRR is the discount rate that makes the NPV of a project equal to ______.

A

0

43
Q

Some projects, such as mines, have cash outflows followed by cash inflows, which are then followed by cash outflows, giving the project multiple rates of return.

A

T

44
Q

Which of the following are mutually exclusive investments?

A restaurant or a gas station on opposite corners.

A restaurant or a gas station on the same piece of land.

Two computer systems - one for the administrative office and one for the security cameras.

Two different choices for the assembly lines that will make the same product.

A

B and D

45
Q

The IRR rule can lead to bad decisions when cash flows are _____ or projects are mutually exclusive.

A

not conventional

46
Q

The ______ rate is the rate at which the NPVs of two projects are equal.

A

crossover

47
Q

In which of the following scenarios would IRR always recommend the wrong decision?

A

Starting cash flow: 1000 Ending cash flow: -2000

48
Q

With nonconventional cash flows, there is a possibility that more than one discount rate will make the NPV of an investment zero. This is called the ________ rates of return problem.

A

multiple

49
Q

IRR approach may lead to incorrect decisions in comparison of two mutually exclusive projects.

A

True

50
Q

The point at which the NPV profile crosses the horizontal axis is the:

A

internal rate of return

51
Q

If a project has multiple internal rates of return, which of the following methods should be used?

NPV

IRR

MIRR

A

A and C

52
Q

A situation in which taking one investment prevents the taking of another is called a mutually _______
investment decision.

A

exclusive

53
Q

The profitability index is calculated by dividing the PV of the _________ cash flows by the initial investment.

A

future

54
Q

The crossover rate is the rate at which the NPVs of two projects are equal.

A

T

55
Q

The profitability index will be bigger than one for a ______
(negative/positive) NPV investment and less than one for a ______
(negative/positive) NPV investment.

A

+, -

56
Q

The IRR can lead to the wrong decision when cash
(inflows/outflows) occur before cash
(inflows/outflows).

A

Field 1: inflows
Field 2: outflows

57
Q

IRR approach may lead to incorrect decisions in comparison of two mutually exclusive projects.

A

T

58
Q

The MIRR function eliminates multiple IRRs and should replace NPV.

A

F

59
Q

The present value of all cash flows (after the initial investment) is divided by the ______ to calculate the profitability index.

A

initial investment

60
Q

The PI rule for an independent project is to ______ the project if the PI is greater than 1.

A

accept

61
Q

Which one of the following methods of project analysis is defined as computing the value of a project based on the present value of the project’s anticipated cash flows?

A

Discounted cash flow valuation

62
Q

The length of time a firm must wait to recoup the money it has invested in a project is called the:

A

payback period

63
Q

The internal rate of return is defined as the:

A

discount rate which causes the net present value of a project to equal zero.

64
Q

If a firm accepts Project X it will not be feasible to also accept Project Z because both projects would require the simultaneous and exclusive use of the same piece of machinery. These projects are considered to be:

A

mutually exclusive

65
Q

Which one of the following will decrease the net present value of a project?

A

Increasing the project’s initial cost at Time 0

66
Q
A

Finance (7 decks)

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