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ADMS 3530 - Connect #6
Corporate Finance (ADMS 3530)
York University
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When companies spend large amounts of money in the hope of generating more cash at a later date, that outlay is called a ______________ expenditure. Ans: Capital
The expected future payoff from a project is discounted by the rate of return offered by comparable investment alternatives. This discount rate is also called _____. Ans: the opportunity cost of capital
The discount rate used for calculating the NPV of an investment is determined by the _____ of the investment. Ans: risk
When calculating the net present value (NPV), the present value of the nth cash flow is calculated by dividing the nth cash flow by 1 plus the _____ rate raised to the nth power. Ans: discount
True or false: When choosing among mutually exclusive projects, choose the one that offers the highest net present value (NPV). Ans: True
Capital expenditures can be made for ___________ assets, such as research and testing costs for the development of a new drug. Ans; intangible
The opportunity cost of capital is best described as _____. Ans: the expected rate of return given up by investing in a project
Which of the following investment criteria tends to lead to the same decisions as net present value? Ans: internal rate of return
Since a risky dollar is worth less than a safe one, cash flows generated by more risky investments should be discounted at ____________ cash flows generated by less risky investments. Ans: a higher rate than
A firm plans to invest $10,000,000 in a new factory that will generate annual cash flows of $3,000,000 for the firm for 5 years and then be scrapped. If the appropriate opportunity cost of capital for this investment is 8%, what will be its net present value (NPV)? (Round your answer to the nearest dollar.) Ans: 1,978,130 Reason:
$1,978,130 = −10,000,000 + $3 million / (1) + $3 million / (1) 2 + $ million / (1) 3 + $3 million / (1) 4 + $3 million / (1) 5 OR: Calculator: CF0 = -10,000,000 , CO1 = 3,000,000 FO1 =5, i=8%, <CPT> NPV = 1,978, 11. If two projects (investments), A and B, are said to be mutually exclusive , then we know that a firm _____. Ans: must choose to invest in either A or B, but not both
In addition to net present value, which of the following criteria can be used when making investment decisions? (Select all that apply.) payback treasury bill rate of return internal rate of return discounted payback
What is the net present value (NPV) of a project with an initial investment of $95, a cash flow of $107 at the end of Year 1, and a discount rate of 6%? (Round your answer to two decimal places.) Ans: $5; Reason: NPV = −$95 + ($107 / 1) = $5.
True or false: The payback rule states that a project should be accepted if its payback period is greater than a specified cutoff period. Ans: FALSE
When choosing among mutually exclusive projects, a firm needs to choose the one that _____. Ans: offers the highest net present value (NPV)
The _____ is the number of periods before the present value of prospective cash flows equals or exceeds the initial investment. Ans: discounted payback
The ______________ rule states that a firm should invest in any project whose rate of return is greater that the opportunity cost of capital. Ans: internal rate of return
The payback period for a project can best be defined as _____. Ans: the length of time until you recover your initial investment
True or false: The rate of return is the discount rate at which a project's net present value equals zero. Ans: TRUE
The capital budgeting method that involves calculating the length of time before a project starts giving a positive net present value is called the _____. Ans: discounted payback period
Ans: 12%; plug percentage that gives NPV closest to ZERO
Which of the following is the correct definition of equivalent annual cost? Ans: It is the cost per period with the same present value as the cost of buying and operating a machine.
_______________ is the rate that depends only on a project's own cash flows. Ans: Internal rate of return
Managers should avoid replacing old machines unless the ________ of a new machine is lower. Ans: equivalent annual cost
Projects that often have a higher net present value can have _______ internal rates of return, in contrast to projects who have high cash inflows early but which do not last a long time. Ans: lower
Investment timing decisions always involves a choice among ________ investments. Ans: mutually exclusive
Capital ______ occurs when there is a limit set on the amount of funds available for investment. Ans: RATIONING
When faced with mutually-exclusive projects with different lives , it is best to calculate the ________________ instead of net present value. Ans: equivalent annual cost
The best approach to solving replacement decisions is to calculate the ___________ of the new machine and the old machine. Ans: equivalent annual cost
When a company is experiencing hard capital rationing, it needs to select the package of projects that will maximize overall ___________ within the budget. Ans: net present value
When a firm's capital is rationed, management should pick the projects that give the highest net present value per dollar of investment. This ratio is called the ______ index. Ans: PROFITABILITY
With _______ capital rationing, a firm's top management, not investors, imposes limits on capital spending. Ans: SOFT
The profitability index should only be used to select projects when funds are __________. Ans: limited
When a company's new projects are limited by the amount of funds it can raise, then it is said to be experiencing _______ capital rationing. Ans: Hard
Which of the following capital investment criteria is consistent with maximizing the value of the firm? Ans: Net present value (NPV)
Profitability index is calculated as the ratio of _____. Ans: net present value to initial investment
When funds are not rationed , a firm should use which criteria to chose projects? Ans: Net present value
Which of the following is the one of the few situations when NPV fails as a decision rule? Ans: When the firm faces capital rationing
ADMS 3530 - Connect #6
Course: Corporate Finance (ADMS 3530)
University: York University
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