Flashcards in Chapter 11 Deck (21):
4 Weaknesses of the IRR
2. Negativity (Sign changes)
3. Order of Cash flows
4. Size Bias (project size)
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
The Golden Decision Maker
NPV Good or Bad?
Good > 0
Benefits > Costs
The process of valuing an investment by determining the present value of its future cash flows is called (the):
b. discounted cash flow valuation.
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.
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.
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.
An investment is acceptable if its IRR:
exceeds the required return.
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
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.
Payback is frequently used to analyze independent projects because:
the cost of the analysis is less than the potential loss from a faulty decision.
What is the net present value of a project with the following cash flows and a required
return of 12 percent?
Year Cash Flow
3 $ 2,750
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
1 $ 8,000
3 $ 9,000
yes; because the IRR exceeds the required return by about 0.39 percent
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
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
What is Capital Budgeting?
Capital budgeting is the process of evaluating and planning for purchases of long-term assets.
the most preferred evaluation technique
net present value
What is the net present value of the following stream of cash flows if the discount rate is 11%?
The decision rule for using the NPV states that when the NPV is greater than ______________ the project should be accepted.