The net present value method – is consistent with the goal of shareholder wealth maximization.- recognizes the time value of money.- uses all of a project’s cash flows.
What is the internal rate of return’s assumption about how cash flows are reinvested? They are reinvested at the project’s internal rate of return.
We compute the profitability index of a capital budgeting proposal by dividing the present value of the annual after tax cash flows by the cash investment in the project.
Which of the following methods of evaluating investment projects can properly evaluate projects of unequal lives? The equivalent annual annuity.
All of the following are criticisms of the payback period criterion except: It deals with accounting profits as opposed to cash flows.
A significant disadvantage of the internal rate of return is that it: -may have an unrealistic reinvestment assumption with respect to the discount rate used for re-investment of the cash flows.-Can result in multiple rates of return (more than one IRR).
Under what condition would you not accept a project that has a positive net present value? If the firm is limited in the capital it has available (capital rationing).
The Net Present Value (or NPV) criteria for capital budgeting decisions assumes that expected future cash flows are reinvested at ________, and the Internal Rate of Return (or IRR) criteria assumes that expected future cash flows are reinvested at ________. the firm’s appropriate discount rate, the internal rate of return
A project would be acceptable if: The net present value is positive.
All of the following are sufficient indications to accept a project except (assume that there is no capital rationing constraint, and no consideration is given to payback as a decision tool): The IRR of a mutually exclusive project exceeds the required rate of return.
When reviewing the net present value profile for a project the IRR will always be a point on the horizontal axis line where NPV = 0.
The net present value always provides the correct decision provided that capital rationing is not imposed.
Which of the following statements about the internal rate of return (IRR) is true? It fully considers the time value of money.
A significant disadvantage of the payback period is that it: Does not properly consider the time value of money.
Mutually exclusive projects occur when: A set of investment proposals perform essentially the same task.
A significant advantage of the internal rate of return is that it: Considers all of a project’s cash flows and their timing.
Project A has an internal rate of return (IRR) of 15 percent. Project B has an IRR of 14 percent. Both projects have a required return of 12 percent. Which of the following statements is most correct? Both projects have a positive net present value (NPV).
Which of the following statements is most correct? The IRR calculation implicitly assumes that all cash flows are reinvested at a rate of return equal to the IRR.
The internal rate of return is: The discount rate that equates the present value of the cash inflows with the present value of the cash outflows.
Which of the following statements about the net present value is true? It may be used to select among projects of different sizes.
An independent project should be accepted if it:

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