33:390:300 Chapter Notes - Chapter 9: Net Present Value, Decision Rule, Cash Flow

90 views3 pages

mauveporcupine901

13 Mar 2017

School

Department

Course

Professor

For unlimited access to Textbook Notes, a Class+ subscription is required.

Document Summary

Adjusts for uncertainty of later cash flows requires an arbitrary cutoff point. Does(cid:374)"t a(cid:272)(cid:272)ept (cid:374)egati(cid:448)e esti(cid:373)ated npv investments when all future cash flows are positive. R&d and new products: average account return, = average net income/ average book value, needs to have a target cutoff rate, decision rule: accept the project if the aar is greater than a preset rate. Not a true rate of return; time value of money is ignored. Based on accounting net income and book values, not cash flows and market values: irr internal rate of return, most important alternative to npv. It is often used in practice and is intuitively appealing. It"s a si(cid:373)ple (cid:449)ay to (cid:272)o(cid:373)(cid:373)u(cid:374)i(cid:272)ate the (cid:448)alue of a proje(cid:272)t to so(cid:373)eo(cid:374)e (cid:449)ho does(cid:374)"t know all the estimation details. Closely related to npv, generally leading to identical decisions. May be useful when available investment funds are limited.

Related Questions

1. Whenever there is a conflict between NPV and anotherdecision rule, you should always use NPV.

A. True

B. False

2. ________ finds one or more companies that specializein the product or service that we are considering.

A. The Objective Approach

B. The Pure Play Approach

C. The Subjective Approach

D. None of the above

3. The required return of bond is best estimated bycomputing the ________ on the bond.

A. Yield-to-maturity

B. market value

C. Risk

D. Both A and B

4. The return earned on assets depends on the ________of those assets.

A. Book value

B. Net book value

C. Risk

D. Liquidity

5. Which of the following is/are correct?

A. If the salvage value is the same as the book value of theasset, then there is a tax effect.

B. Book value = initial cost - accumulated depreciation

C. After-tax salvage = salvage - Tax Rate x (salvage - bookvalue)

D. Both B and C

6. ________ is the most important alternative to NetPresent Value.

A. IRR

B. Payback Method

C. Average Accounting Return

D. Discounted Payback

7. The mean difference between Payback and DiscountedPayback is:

A. Discounted Payback accounts for the time value of money andPayback does not

B. Discounted Payback accounts for the risk of the cash flowsand Payback does not

C. Only Payback does not provide an indication about theincrease in value

D. Both A and B

8. The ________ measures the time to get the initialcost back.

A. Internal Rate of Return

B. Net Present Value

C. Payback period

D. Profitability Index

9. Which of the following element/s should be consideredwhen evaluating capital budgeting decision rules?

A. Time value of money

B. Adjustment for risk

C. Creating value for the firm

D. All of the above

lilacsardine75

1. The ________ considers the project'srisk relative to the firm overall risk.

A. The Objective Approach

B. The Pure Pay Approach

C. The Subjective Approach

D. The Bottom-Up Approach

2. ________ are not tax deductible, so there is no taximpact on the cost of equity.

A. Interest expenses

B. Director's remuneration

C. Dividends

D. All of the above

3. ________ itself is a non-cash expense and it is onlyrelevant because it affects taxes.

A. Depreciation expense

B. Interest expense

C. Capital gain

D. Both A and C

4. Which of the following is correct about AverageAccounting Return

A. Reject the project if the ARR is less than a preset rate

B. Accept the project if the ARR is large than IRR

C. Accept the project if the ARR is greater than a presetrate

D. ARR must be equal to a preset rate for the acceptance of aproject

5. What is the disadvantage of Paybackmethod?

A. Difficult to understand

B. No adjustment for uncertainty of later cash flows

C. Ignores the time value of money

D. Biased again short-term project

6. Which of the following statement is true about NetPresent Value decision rule?

A. If the NPV is negative, reject the project

B. A negative NPV mean the project will increase the wealth ofthe owners

C. If value of the NPV means the amount of value created for thefirm

D NPV rule does not account for the time value of money

maroonmosquito263

5. Which of the following is/are correct?

A. If the salvage value is the same as the book value of theasset, then there is a tax effect.

B. Book value = initial cost - accumulated depreciation

C. After-tax salvage = salvage - Tax Rate x (salvage - bookvalue)

D. Both B and C

6. ________ is the most important alternative to NetPresent Value.

A. IRR

B. Payback Method

C. Average Accounting Return

D. Discounted Payback

7. The mean difference between Payback and DiscountedPayback is:

A. Discounted Payback accounts for the time value of money andPayback does not

B. Discounted Payback accounts for the risk of the cash flowsand Payback does not

C. Only Payback does not provide an indication about theincrease in value

D. Both A and B

8. The ________ measures the time to get the initialcost back.

A. Internal Rate of Return

B. Net Present Value

C. Payback period

D. Profitability Index

9. Which of the following element/s should be consideredwhen evaluating capital budgeting decision rules?

A. Time value of money

B. Adjustment for risk

C. Creating value for the firm

D. All of the above

magentaporcupine879

33:390:300 Chapter Notes - Chapter 9: Net Present Value, Decision Rule, Cash Flow

Document Summary

Get access

Related Documents

MGT 181 Lecture Notes - Lecture 4: Net Present Value, Decision Rule, Cash Flow

HTA 602 Lecture Notes - Lecture 9: Net Present Value, Payback Period, Cash Flow

CCT321H5 Lecture Notes - Lecture 7: Net Present Value, Decision Rule, Cash Flow

Related Questions