Chapter 11 Self-Test Definitional Questions 1. A firm’s _________ budget outlines its planned expenditures on fixed assets. 2. The number of years necessary to return the original investment in a project is known as the _________ period. 3. The shorter the payback period, other things held constant, the greater the project’s ___________. 4. One important weakness of payback analysis is the fact that cash _______ beyond the payback period are _________. 5. The Net Present Value (NPV) method of evaluating investment proposals is a(n) ____________ cash flow technique. 6. A capital investment proposal should be accepted if its NPV is __________. 7. If two projects are mutually ___________, the one with the ________ positive NPV should be selected. 8. In the IRR approach, a discount rate is sought that makes the NPV equal to ______. 9. A net present value _________ is a graph that shows the relationship between a project’s _____ and the firm’s cost of capital. 10. If two mutually exclusive projects are being evaluated and one project has a higher NPV while the other project has a higher IRR, the project with the higher _____ should be preferred. 11. The NPV method implicitly assumes reinvestment at the project’s cost of _________, while the IRR method implicitly assumes reinvestment at the __________ rate of ________. 12. The MIRR method assumes reinvestment at the cost of _________, making it a better indicator of a project’s profitability than IRR. 13. The internal rate of return (IRR) is the __________ rate that equates the present value of a project’s expected cash inflows to the present value of its _______. 14. The MIRR is defined as the discount rate at which the present value of a project’s cost is equal to the present value of its __________ value, which is found as the sum of the future values of the cash inflows, compounded at the firm’s cost of capital. 15. Taking on a project whose IRR exceeds its cost of capital increases _______________ wealth. 16. The NPV profile crosses the Y-axis at the ______________ NPV, while it crosses the X-axis at the _____. 17. If a(n) _____________ project is being evaluated, then the NPV and IRR criteria always lead to the same accept/reject decisions.
THE BASICS OF CAPITAL BUDGETING 18. Two basic conditions can lead to conflicts between NPV and IRR: _______ and ________ differences. 19. __________ IRRs can result when the IRR criterion is used with a project that has nonnormal cash flows. 20. The ___________ rate is the cost of capital at which the NPV profiles of two projects intersect and, thus, at which the projects’ NPVs are equal. 21. ______ is superior to the regular IRR as an indicator of a project’s “true” rate of return, or “expected long-term rate of return.” 22. The discounted _________ period is the length of time required for an investment’s cash flows, discounted at the investment’s cost of capital, to cover its cost. 23. _____________ projects are those whose cash flows are not affected by the acceptance or nonacceptance of other projects. 24. The __________ rate of return is an estimate of the project’s rate of return.
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