A project costs RM10,000 and is expected to return after-tax cash flows of RM3,000 each year for the next 10 years. This project’s payback period is
a. three years.
b. three and one-third years.
All of the following criteria for capital-budgeting decisions adjust for the time value of money EXCEPT
c. payback period.
d. profitability index.
If the IRR is greater than the required rate of return, the
a. present value of all the cash inflows will be greater than the initial outlay.
b. payback will be less than the life of the investment.
c. project should be rejected.
d. both A and B.
a. ignores the time value of money.
b. deals with cash flows rather than accounting profits.
c. measures how quickly the project will return its original investment.
d. ignores cash flows.
The firm should accept independent projects if
a. the payback is less than the IRR.
b. the profitability index is greater than 1.0.
c. the IRR is positive.
d. the NPV is greater than the discounted payback.
The IRR is
a. the discount rate that makes the NPV positive.
b. the discount rate that equates the present value of the cash inflows with the cost of the project.
c. the discount rate that makes the NPV negative and the profitability index greater than one.
d. the rate of return that makes the NPV positive.
The NPV assumes cash flows are reinvested at the
c. real rate of return.
d. cost of capital.
The NPV method
a. is consistent with the goal of shareholder wealth maximization.
b. recognizes the time value of money.
c. uses cash flows.
d. all of the above.
We compute the profitability index of a capital-budgeting proposal by
a. multiplying the IRR by the cost of capital.
b. dividing the present value of the annual after-tax cash flows by the cost of capital.
c. dividing the present value of the annual after-tax cash flows by the cost of the project.
d. multiplying the cash inflow by the IRR.
What is the term for the discount rate that equates the present value of a project’s future net cash flows with the project’s initial cash outlay?
a. The MIRR
b. The hurdle rate
c. The IRR
d. The accounting rate of return
c. four years.
d. 10 years.