Final (Ch. 8)

Question 1

Net Present Value (NPV)

Answer 1

• The difference between an investment’s market value and its cost

Question 2

Payback Period

Answer 2

• The amount of time required for an investment to generate cash flows sufficient to recover its initial cost

Question 3

Average Accounting Return (AAR)

Answer 3

• An investment’s average net income divided by its average book value

Question 4

Average Accounting Rule (AAR)

Answer 4

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

Question 5

Internal Rate of Return (IRR)

Answer 5

• The Discount rate that makes the net present value of an investment zero

Question 6

IRR Rule

Answer 6

• Based on the IRR rule, an investment is acceptable if the IRR exceeds the required return. It should be rejected otherwise.

Question 7

Important

Answer 7

The IRR on an investment is the required return that results in a zero NPV when it is used as the discount rate.

Question 8

Multiple Rates of Return

Answer 8

• The possibility that more than one discount rate will make the net present value of an investment zero

Question 9

Mutually Exclusive Investment Decisions

Answer 9

• A situation where taking one investment prevents the taking of another

Question 10

Probability Index (PI)

Answer 10

• The present value of an investment’s future cash flows divided by its initial cost. Also benefit-cost ratio