Financial Decisions Model Part 2

Question 1

The payback method typically ignores the

Answer 1

Time value of money and computes the number of years it will take for cash flows to equal (pay back) the initial investment

Question 2

with even cash flows, payback period is calculated as

Answer 2

initial cost / annual net cash inflows

Question 3

Computation of the payback method with uneven cash flows involves using a cumulative approach.

Answer 3

the candidate can quickly review the first three year’s of after-tax cash flows and determine that the amount

Question 4

IRR =

Answer 4

Net incremental Investment / Net Annual Cash Flows

Question 5

the Internal rate of return is equal to the discounted rate at which the NPV of the investment is equal to zero

Answer 5

the $225,660 Present Value of after-tax cash flows associated with the investment discounted at 10% is equal to the value of the investment

Question 6

the internal rate of return method computes the rate of return where net present value equals zero.

Answer 6

the method equates the initial investment with the present value of the future cash inflows

Question 7

the internal rate of return is computed as

Answer 7

PV factor = Investment / Cash flows ==> the higher the present value factor, the lower the computed rate(internal Rate of return). Increases to the investment or decreases to the cash flows serve to increase the present value factor

Question 8

what is an internal rate of return

Answer 8

A time-adjusted rate of return from an investment —- the internal rate of return isone of may capital budgting techniques that utilize present value concepts to value both the investment and the related cash flows. These methods are generally referred to as using a time-adjusted rate of return.

Question 9

The IRR is the discount rate that produces a NPV of

Answer 9

Zero

Question 10

the IRR is defined as the technique that determines the present value factor such that the present value of the after-tax cash flows equals the initial investment on the project. Alternately, the IRR is discount rate that produces a NPV of

Answer 10

Zero

Question 11

the payback method typically ignores

Answer 11

the time value of money

Question 12

with even cash flows, the payback period is calculated as

Answer 12

initial cost / annual net cash outflows

Question 13

The Internal Rate of return is computed as follows

Answer 13

Investment / Cash flow = Present value factor

Question 14

the higher the present value factor, the lower the computed rate

Answer 14

(internal Rate of return) increases to the investment or decreases to the cash flows serve to increase the present value factor

Question 15

the payback period is the time period required for cash inflows to recover the initial investment

Answer 15

the emphasis of the technique is on liquidity