Exam 5: Net Present Value and Other Investment Rules

You are considering two independent projects with the following cash flows. The required return for both projects is 10%. Given this information,which one of the following statements is correct?

What is the profitability index for an investment with the following cash flows given a 9% required return?

List and briefly discuss the advantages and disadvantages of the internal rate of return (IRR) rule.

You are considering the following two mutually exclusive projects. Both projects will be depreciated using straight-line depreciation to a zero book value over the life of the project. Neither project has any salvage value. Required rate of return 10% 13% Required payback period 2.0 years 2.0 years Based upon the payback period and the information provided in the problem,you should:

The advantages of the payback method of project analysis include the: I. application of a discount rate to each separate cash flow. II) bias towards liquidity. III) ease of use. IV) arbitrary cutoff point.

Given the goal of maximization of firm value and shareholder wealth,we have stressed the importance of net present value (NPV). And yet,many financial decision-makers at some of the most prominent firms in the world continue to use less desirable measures such as the payback period and the average accounting return (AAR). Why do you think this is the case?

An investment is acceptable if the profitability index (PI) of the investment is:

If you want to review a project from a benefit-cost perspective,you should use the _______ method of analysis.

Graphing the NPVs of mutually exclusive projects over different discount rates helps demonstrate:

The discounted payback period of a project will decrease whenever the:

You are considering two mutually exclusive projects with the following cash flows. Will your choice between the two projects differ if the required rate of return is 8% rather than 11%? If so,what should you do?

Payback is frequently used to analyze independent projects because:

The discounted payback rule may cause:

You are considering a project with an initial cost of $4,300. What is the payback period for this project if the cash inflows are $550,$970,$2,600,and $500 a year over the next four years?

The payback period rule is a convenient and useful tool because:

Graham and Harvey (2001) found that _____ and _____ were the two most popular capital budgeting methods.

All else constant,the net present value of a typical investment project increases when:

The discounted payback period rule:

Explain the differences and similarities between net present value (NPV) and the profitability index (PI).

Which of the following methods of project analysis are biased towards short-term projects? I. Internal rate of return II. Net present value III. Payback IV. Discounted payback