Flashcards in Chapter 11 Deck (21):

1

## 4 Weaknesses of the IRR

###
1. Additivity

2. Negativity (Sign changes)

3. Order of Cash flows

4. Size Bias (project size)

2

##
AARR

1. Equation?

2. What it stands for?

3. When do you accept it?

###
Average Net Income / Average Book Value Assets

Average Accounting Rate of Return

Accept when > ROA

3

## The Golden Decision Maker

### NPV

4

## NPV Good or Bad?

###
Good > 0

Benefits > Costs

5

## The process of valuing an investment by determining the present value of its future cash flows is called (the):

### b. discounted cash flow valuation.

6

## Which one of the following statements concerning net present value (NPV) is correct?

### An investment should be accepted if the NPV is positive and rejected if it is negative.

7

## Which one of the following statements is correct concerning the payback period?

### An investment is acceptable if its calculated payback period is less than some pre-specified period of time.

8

## MIRR

### Reinvestment rate is different than the IRR. It is Modified to be more accurate. Re-investment rate will not be as high as the IRR.

9

## An investment is acceptable if its IRR:

### exceeds the required return.

10

## The possibility that more than one discount rate will make the NPV of an investment equal to zero is called the _____ problem.

### multiple rates of return

11

## The primary reason that company projects with positive net present values are considered acceptable is that:

### they create value for the owners of the firm.

12

## Payback is frequently used to analyze independent projects because:

### the cost of the analysis is less than the potential loss from a faulty decision.

13

##
What is the net present value of a project with the following cash flows and a required

return of 12 percent?

Year Cash Flow

0 -$28,900

1 $12,450

2 $19,630

3 $ 2,750

### -$177.62

14

##
An investment has the following cash flows. Should the project be accepted if it has been assigned a required return of 9.5 percent? Why or why not?

Year Cash Flow

0 -$24,000

1 $ 8,000

2 $12,000

3 $ 9,000

### yes; because the IRR exceeds the required return by about 0.39 percent

15

## A project has an initial cost of $1,900. The cash inflows are $0, $500, $900, and $700 over the next four years, respectively. What is the payback period?

###
d. 3.71 years

16

## What are the 3 criteria for a good investment?

###
1. Time Value of Money

2. Objective Decision Rule/Required Rate of Return

3. Consider all of the Cash flows

17

## What is Capital Budgeting?

### Capital budgeting is the process of evaluating and planning for purchases of long-term assets.

18

## the most preferred evaluation technique

### net present value

19

##
What is the net present value of the following stream of cash flows if the discount rate is 11%?

(21,400,000)

7,800,000

8,100,000

7,100,000

6,400,000

### $1.6 million

20

## The decision rule for using the NPV states that when the NPV is greater than ______________ the project should be accepted.

### Zero

21