week 3 - lectures slides

Question 1

T/F
“Maximizing shareholders’ wealth is equivalent to maximizing the
discounted cash flows provided by investment projects”

Answer 1

True

Question 2

what are the 3 major problems that managers face when the y make an investment decision?

Answer 2

1) they have to search out new opportunities in the marketplace or new technologies (these are the basis of growth)
2) they have to estime the expected cash flows from these projects
3) they have to evaluate the projects according to sound decision rules

Question 3

valuation is all about cash flows
t/f

Answer 3

true

Question 4

What is the NPV (net present value)?

Answer 4

The difference between an investment’s present
value of cash inflows and its cost

Question 5

what is the IRR (Internal rate of return)?

Answer 5

The discount rate that
makes the NPV of an
investment zero

Question 6

what does the profitability index represent?

Answer 6

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

Question 7

what does the payback rule indicate?

Answer 7

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

Question 8

what is the average accounting return?

Answer 8

an investment’s average net income divided by its average book value