CHAPTER 7 Flashcards
(42 cards)
NPV is positive only for discount rates greater than the internal rate of return.
NO
To decide whether to invest using the NPV rule, we need to know the cost of capital.
YES
About 75% of firms surveyed used the NPV rule for making investment decisions.
YES
If you are unsure of your cost of capital estimate, it is important to determine how sensitive your analysis is to errors in this estimate.
YES
The IRR can provide information on how sensitive your analysis is to errors in
the estimate of your cost of capital.
YES
In general, the difference between the cost of capital and the IRR is the maximum
amount of estimation error in the cost of capital estimate that can exist without
altering the original decision.
YES
If you are unsure of your cost of capital estimate, it is important to determine
how sensitive your analysis is to errors in this estimate.
YES
If the cost of capital estimate is more than the IRR, the NPV will be positive.
NO
Assuming that Dewey’s cost of capital is 12% EAR, then the number of potential IRRs that exist for this problem is equal to 1.
YES
The IRR investment rule states that you should take any investment opportunity
where the IRR exceeds the opportunity cost of capital.
YES
The IRR investment rule states you should turn down any investment opportunity where the IRR is less than the opportunity cost of capital.
YES
There are situations in which multiple IRRs exist.
YES
Since the IRR rule is based upon the rate at which the NPV equals zero, like the
NPV decision rule, the IRR decision rule will always identify the correct investment decisions.
NO
When using the internal rate of return (IRR) investment rule, we compare the NPV of the investment opportunity to the average return on the investment
opportunity.
NO
When using the internal rate of return (IRR) investment rule, we compare the average return on the investment opportunity to returns on all other
investment opportunities in the market.
NO
When using the internal rate of return (IRR) investment rule, we compare the average return on the investment opportunity to the risk-free rate of return.
NO
When using the internal rate of return (IRR) investment rule, we compare the average return on the investment opportunity to returns on other alternatives
in the market with equivalent risk and maturity.
YES
In general, there can be as many IRRs as the number of times the project’s cash
flows change sign over time.
YES
A NPV will always exist for an investment opportunity.
YES
An IRR will always exist for an investment opportunity.
NO
The payback investment rule is based on the notion that an opportunity that
pays back its initial investments quickly is a good idea.
YES
For most investment opportunities expenses occur initially and cash is received
later.
YES
Fifty percent of firms surveyed reported using the payback rule for making
decisions.
YES
The payback rule is useful in cases where the cost of making an incorrect
decision might not be large enough to justify the time required for calculating the
NPV.
YES