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Chapter 7
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Gravity
Terms in this set (10)
A proposed project has a positive net present value. If this project is accepted, then;
shareholder wealth will increase.
Assume a project has normal cash flows. According to the accept/reject rules, the project should be accepted if the:
IRR exceeds the required return.
Projects A and B require an initial investment of $48,000 and $98,000, respectively. The projects are mutually exclusive and both have positive net present values. Which of these methods is probably the best method to use to determine which project to accept?
Incremental IRR
The present value of an investment's future cash flows divided by the initial cost of the investment is called the:
profitability index.
One advantage of the payback method of project analysis is the method's:
bias towards liquidity.
No matter how many forms of investment analysis you perform:
the actual results from a project may vary significantly from the expected results.
What is the key reason why a positive NPV project should be accepted?
The project is expected to increase shareholder value.
The payback method is a convenient and useful tool because:
it provides a quick estimate of how rapidly an initial investment will be recouped.
What is the primary shortcoming of the average accounting rate of return from a financial perspective?
The use of net income rather than cash flows
Two key weaknesses of the internal rate of return rule are the:
failure to correctly analyze mutually exclusive projects and the multiple rate of return problem.
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