Chapter 9

Question 1

NPV

Answer 1

Best for mutually exclusive projects

Question 2

IRR (Internal Rate of Return)

Answer 2

The required rate of return, or discount rate, that will yield a 0 NPV.

Can have multiple if CFs are unconventional

Question 3

Crossover Rate

Answer 3

Project B-A (CFs) —> Calc IRR

Tells us the rate that makes A=B
If disc rate is lower than IRR, A is preferable

Question 4

MIRR

Answer 4

If CFs are non-conventional:
1)Take PV of negative future cash flow and add it to Year 0.
2)Then calc IRR

Question 5

PV =

Answer 5

PV = FV/(1+r)^t

Question 6

Payback Period

Answer 6

Investment is acceptable if the calculated period is less than the pre-specified # of years.

Shows fastest projects to benefit company, but ignores time value of $

Question 7

Discounted Payback

Answer 7

NPV of cash flows. Always more than the regular payback period

Question 8

AAR (Average Accounting Return)

Answer 8

= avg net income/avg book value

Question 9

Profitability Index

Answer 9

PV of future CF/Initial investment OR
1 + NPV/Initial Investment

NPV = PV future CF - Initial investment