CHAPTER 8 TEST PRACTICE - CHAPTER 8 TEST PRACTICE Capital...

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CHAPTER 8 TEST PRACTICE: . Capital budgeting is probably the most important of the three key areas of concern to the financial manager because: ans: It defines the business of the firm: this is the right answer Its the least understood its the most controversial its the most difficult .________ is a measure of how much value is created or added by undertaking an investment. ans: Net Present Value . Higher cash flows earlier in a project’s life are _____ valuable than higher cash flows later on. ans: more . What is the NPV of a project with an initial investment of $95, a cash flow in one year of $107, and a discount rate of %6? ans: NPV= -$95+ ($107/1.06)=$5.94 . The basic NPV investment rule is: (are the following): accept a project if the NPV is greater than zero if the NPV is equal to zero, acceptance or rejection of the project is a matter of indifference reject a project is its NPV is less than zero. . The payback period rule_____ a project if it has a payback period that is less than or equal to a particular cutoff date. ans: accepts . One of the flaws of the payback period method is that cash flows after the cutoff
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