8-Final

Question 1

NPV utilized to determine the efficacy of project and investments

Answer 1

a powerful decision-making tool that helps financial managers assess whether a project will generate more value than it costs

Question 2

Advantages of NPV

Answer 2

time value of money, clear decision rule, focus on value creation, accounts for all cash flows, and adjustable for risk

Question 3

Disadvantages of NPV

Answer 3

difficult to forecast accurately, sensitive to assumptions, not easily comparable without adjustments, and doesn’t show return rate

Question 4

Payback Rule

Answer 4

accept the project if it pays back within a certain time

Question 5

Payback period

Answer 5

time needed to recover the investment

Question 6

IRR

Answer 6

tells you the rate of return a project is expected to generate
used for: comparing multiple projects, time value of money, and all project cash flows

Question 7

Profitability Index

Answer 7

shows the value per dollar invested

Question 8

Profitability Index Advantages

Answer 8

simple to us, time value of money, and useful when resources are limited

Question 9

Decisions around capital rationing

Answer 9

rank projects by profitability index, from highest to lowest. Choose the combination of projects that fit within the budget and give the highest total profitability index