Chapter 7

Question 1

NPV Rule

Answer 1

Choose the project with the highest NPV

Question 2

NPV profile

Answer 2

graph that shows the NPVs and IRR

Question 3

Maximum estimation error

Answer 3

Cost of capital - IRR

Question 4

IRR Investment Rule is based on

Answer 4

Undertake a project if IRR > opportunity cost of capital
- If negative cash flows > positive cash flows

Question 5

When does IRR fail

Answer 5

Positive cash flows > negative cash flows
Multiple IRRs
No IRRs

Question 6

Payback investment rule

Answer 6

Only accept a project if its cash flows cover its initial investment within a prespecified period

Question 7

NPV and Mutually Exclusive

Answer 7

Find NPV
Rank them
Choose highest NPVed project

Question 8

IRR isn’t meaningful when

Answer 8

Differences in scale
Differences in timing
Differences in Risk

Question 9

Incremental IRR

Answer 9

IRR of the incremental cash flows that would result from replacing one project with another

Question 10

Profitability index

Answer 10

Measures the value created in terms of NPV per unit of resource consumed
–> Value created / Resource consumed = NPV / Resource consumed