- In capital budgeting, the net present value is the value of a project's ______ to the company.

Multiple choice question.

cash flows

The decision rule for a project for which the first cash flow is an inflow and subsequent cash flows are
negative states that we should ____ the project when the IRR is ____ than the discount rate.
• Accept; less
• Reject; greater

If the IRR is greater than the opportunity cost of capital, we should ___.
accept the project

For "normal" cash flows (the outflows occur before the inflows), the NPV is ______ if the
discount rate is less than the IRR, and it is ______ if the discount rate is greater than the IRR.
Positiev,neative

A project with an initial cash outflow followed by a cash inflow and then a cash outflow ____.
may have multiple rates of return

When an initial cash outflow is followed by cash inflows, NPV is ______ if the opportunity cost of
capital is greater than the IRR.
negative

- The discount rate assigned to a project reflects the ____.

risk of the project
opportunity cost to the investor

- Capital ______ occurs when a firm doesn't have enough capital to fund all its positive NPV
projects.
Rationing
A project with a cash inflow of $200 followed by a cash outflow of (-$250) one year later will have an
IRR of ___ percent.
Reason: 

IRR is the interest rate that makes the NPV = 0:

0 = +$200 - $2501+IRR$2501+IRR
Solving for IRR:
→ IRR = $250$200$250$200 - 1 = 25%

Two mutually exclusive projects can be evaluated by:

comparing the incremental IRR to the discount rate.
comparing the NPVs of the two projects.

Two mutually exclusive projects can be evaluated by:

comparing the NPVs of the two projects

For a project with a positive initial cash flow followed by negative cash flows, we should:
accept if the IRR is less than R

What does value additivity mean for a firm?

Multiple choice question.

The NPV values of individual projects can be added together.

All projects with positive NPVs will add an equal amount of value to a firm.
Reason: 
The value added to a firm by a project is equal to the project's NPV.

A new project will always add value to a firm.

Reason: 
A project must have a positive NPV to increase firm value.

NPV ______ cash flows properly.

discounts

In capital budgeting, the net ______ is the value of a project to the company.
Multiple choice question.

present value

The property of value ______ implies that the contribution of any project to a firm's value is simply the
NPV of the project.
present value

additivity

The ______ method differs from NPV because it evaluates a project by determining the time needed to
recoup the initial investment.
Payback

Capital rationing requires a company to ____.

Multiple choice question.

accept all projects with profitability indexes greater than 1

limit their investments

accept all projects with positive IRRs

accept all projects with positive NPVs

Reason: 
In an ideal world, firms would be able to accept all projects with positive NPVs. However, most
if not all firms have limits to how much they can invest, so they must use capital rationing to
select the projects that will result in the highest NPVs.

The payback rule ______ a project if it has a payback period that is less than or equal to a particular
cutoff date.
accepts

What does value additivity mean for a firm?

Multiple select question.

The NPV values of individual projects can be added together.

The value of a firm is simply the combined value of the firm's projects, divisions, and entities
owned by the firm.

All projects with positive NPVs will add an equal amount of value to a firm.
Reason: 
The value added to a firm by a project is equal to the project's NPV.

A new project will always add value to a firm.

Reason: 
A project must have a positive NPV to increase firm value.

How does the timing and the size of cash flows affect the payback method? Assume the project
does pay back within the project's lifetime.
Multiple choice question.

An increase in the size of the first cash inflow will decrease the payback period, all else held
constant.

Receiving every cash inflow sooner will increase the payback period, all else held constant.
Reason: 
Receiving cash inflows sooner will decrease the payback period.

The timing but not the size of the cash flows affects the payback period.
Reason: 
Both the timing and the size of the cash flows can affect the payback period.

A delay in receiving the cash inflows will decrease the payback period.
Reason: 
A delay in receiving cash inflows will increase the payback period.

Three attributes of NPV are that it:

uses cash flow.
uses all the cash flows of the project.
discounts the cash flows properly.

The payback period can lead to incorrect decisions because it ____.

Multiple choice question.

ignores cash flows after the cutoff date

The property of value ______ implies that the contribution of any project to a firm's value is
simply the NPV of the project.
Multiple choice question.

additivity

Which of the following are weaknesses of the payback method?

It gives equal weight to all cash flows before the cutoff date.
Cash flows received after the payback period are ignored.

The payback method differs from ______ because it evaluates a project by determining the time
needed to recoup the initial investment.

NPV

One of the flaws of the payback period method is that cash flows after the cutoff date are ___.
not considered in the analysis

The payback rule ______ a project if it has a payback period that is greater than a particular cutoff date.
rejects

One of the weaknesses of the payback period is that the cutoff date is a(n) ______ standard.
arbitrary
How does the timing and the size of cash flows affect the payback method? Assume the project does pay
back within the project's lifetime.
An increase in the size of the first cash inflow will decrease the payback period, all else held constant.

Arrange the steps involved in the discounted payback period in order starting with the first step.
 1. Discount the cash flows using the discount rate.
2. Add the discounted cash flows.
3. Accept if the discounted payback period is less than some pre-specified number
of years.

The payback period can lead to _____________ because it ignores cash flows after the cutoff
date.
incorrect decisions

Which capital budgeting decision method finds the present value of each cash flow before
calculating a payback period?
Discounted payback period

Which of the following are weaknesses of the payback method?

- the cutoff date is arbitrary
- time value of money principles are ignored
- cash flows received after the payback period are ignored

A major problem that still exists with the discounted-payback-period method is the:
arbitrary cutoff date

The payback period can lead to ____________ because it ignores cash flows after the cutoff
date.
incorrect decisions

The most important alternative to NPV is the ______ method.

internal rate of return

One of the weaknesses of the payback period is that the cutoff date is a(n) ______ standard.
arbitrary

The IRR is the _________ that makes the NPV of a project equal to zero.
discount rate

Arrange the steps involved in the discounted payback period in order starting with the first step.
1. Discount the cash flows using the discount rate
2. Add the discounted cash flows

3. Accept if the discounted payback period is less than some pre-specified number of years

What is the IRR for a project with an initial investment of $250 and subsequent cash inflows of
$100 per year for 3 years?
9.70%

True or false: A project with an initial cash outflow followed by a cash inflow has an NPV that is
positively related to the discount rate.

False

You must know the _________ rate to compute _______, while the discount rate is necessary
to apply ______.
discount, NPV, IRR

Which of the following are true for a project with a negative initial cash flow followed by
positive cash flows?
Reject if IRR is less than market rate of financing.
Accept if NPV is greater than zero.

Internal rate of return (IRR) must be compared to the ______ rate in order to determine the
acceptability of a project.
Discount
required return

True or false: A project with an initial cash outflow followed by a cash inflow has an NPV that is
negatively related to the discount rate.
True

According to the basic IRR rule, we should ____ a project if the IRR is ____ than the
opportunity cost of capital.
reject; less
accept; greater
For "normal" cash flows (the outflows occur before the inflows), the NPV is ______ if the discount rate is
less than the IRR, and it is ______ if the discount rate is greater than the IRR.

positive; negative

When an initial cash outflow is followed by cash inflows, NPV is:

equal to zero when the opportunity cost of capital equals the IRR.
positive when the opportunity cost of capital is less than the IRR.
negative when the opportunity cost of capital is greater than the IRR.

A project with a cash inflow of $185 followed by a cash outflow of (-$250) one year later will
have an IRR of ___ percent.
Reason: 
IRR is the interest rate that makes the NPV = 0:
0 = +$185 - $2501+IRR$2501+IRR
Solving for IRR:
→ IRR = $250$185$250$185 - 1 = 35%

The internal rate of return is a function of ____.

a project's cash flows

Two challenges with the IRR approach when comparing 2 mutually exclusive projects are scale
and cash flow timing.
True or false: Two challenges with the IRR approach when comparing two projects are scale and
differing cash flow patterns over time.
True

True or false: The scale of a project can be an issue with IRR when choosing between mutually
exclusive projects.
True
______ cash flows earlier in a project's life are more valuable than higher cash flows later on.
Higher

The discounted cash flow valuation shows that higher cash flows earlier in a project's life are ______
valuable than higher cash flows later on.

More

True or false: Investing more money in a project is a guarantee of greater profits.

False

The net present value of a project's cash flows is divided by the ______ to calculate the
profitability index.
initial investment

True or false: The scale of a project is never a concern when using IRR.
False

What is the profitability index for a project with an initial investment of $30 and subsequent cash inflows
of $80 in Year 1 and $20 in Year 2 if the discount rate is 12 percent?

Reason: 
Profitability index = $801.12+$201.254$30$801.12+$201.254$30 = 2.91
=((80/1.12)+(20/1.12^2))/30=2.91

Higher cash flows earlier in a project's life are ______ valuable than higher cash flows later on.
more

Which type of rationing occurs when a firm can't raise more money from the capital markets?
Hard

Reason: 
Soft rationing occurs when management adopts limits as an aid to financial control.
The net present value of a project's cash flows is divided by the initial investment to calculate the
______.
profitability index.