When evaluating a project with non-normal cash flows (cash flows change sign for at least two times during the project life), the best method to use for capital budgeting analysis is the: internal rate of return payback rule discounted payback Modified internal rate of return (MIRR)
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When evaluating a project with non-normal cash flows (cash flows change sign for at least two times during the project life), the best method to use for capital budgeting analysis is the:
internal rate of return payback rule
discounted payback
Modified internal rate of return (MIRR)
Step by step
Solved in 4 steps
- Under which one of the capital budgeting, projects is the sum of all present values of all cash inflows minus present value of outflows? а. Post payback period b. Payback period С. Internal rate of return d. Net present value method When evaluating a proposed project under capital budgeting by the net present value method, if the NPV negative, the proposal is should be rejected. Select one: True FalseWhat are the advantages of using the NPV method of assessing capital budgeting projects over the Pay Back Period method?To calculate net present value of a project with normal cash flows, find the present value of the expected cash flows, and subtract A) retained earnings. B) the cost of the investment. C) the factor loading. D) the payback period.
- 2. Match each of the following terms with the appropriate definition. The time expected to recover the cash initially invested in a project. A minimum acceptable rate of return on a potential investment. 1. Discounting A return on investment which results in a zero net present value. 2. Net Present Value A comparison of the cost of 3. Capital Budgeting an investment to its projected cash flows at a single point in time. 4. Accounting Rate of Return 5. Net Cash Flow A capital budgeting method focused on the rate of return on a project's average investment. 6. Internal Rate of Return 7. Payback Period The process of restating future cash flows in terms 8. Hurdle Rate of present time value. Cash inflows minus cash outflows for the period. A process of analyzing alternative long-term investments. >Examine the following statements. (i) Payback period method measure the true profitability of a project. (ii) Capital Rationing and capital budgeting mean the same thing. (iii) Internal Rate of Return and Time Adjusted rate of Return are the same thing. (iv) Rate of Return takes into account the time value of money. A. (i), (ii) and (iii) are correct. B. (ii) and (iii) are correct. C. Only (iii) is correct. D. All (i), (ii), (iii) and (iv) are falseThe internal rate of return method assumes that a project's cash flows are reinvested at the: Multiple Choice internal rate of return. simple rate of return. required rate of return. payback rate of return.
- The net present value (NPV) and the internal rate of return (IRR) capital budgeting methods make assumptions about the reinvestment rate of cash inflows over the life of the project. Which one of the following statements is correct with respect to this reinvestment rate of cash inflows? Select the correct response: Under both NPV and IRR the reinvestment rate is the risk-free rate of return. Under NPV and IRR the reinvestment rates are the cost of capital rate and the internal rate of return, respectively. Under NPV and IRR the reinvestment rates are the cost of capital rate and the risk-free rate of return, respectively. Under NPV and IRR the reinvestment rates are the cost of capital rate and the asset risk premium rate, respectively.This method solves for the interest rate that equates the equivalent worth of a project's cash outflows (expenditures) to the equivalent worth of cash inflows (receipts or savings). O A. Payback Period O B. Profitability Index O C. Rate of Return O D. MARRThe Basics of Capital Budgeting: Evaluating Cash Flows: IRR A project's internal rate of return (IRR) is the that forces the PV of the expected future cash flows to equal the initial cash flow. The IRR is an estimate of the project's rate of return, and it is comparable to the on a bond. The equation for calculating the IRR is: CFt is the expected cash flow in Period t and cash outflows are treated as negative cash flows. There must be a change in cash flow signs to calculate the IRR. The IRR equation is simply the NPV equation solved for the particular discount rate that causes NPV to equal .The IRR calculation assumes that cash flows are reinvested at the . If the IRR is than the project's cost of capital, then the project should be accepted; however, if the IRR is less than the project's cost of capital, then the project should be . Because of the IRR reinvestment rate assumption, when projects are evaluated the IRR approach can lead to conflicting results from the NPV method.…
- Which of the following is not a capital budgeting technique? Select one: a. Net present value b. Discounted Payback period c. Payback Period d. Profitability index e. Ratio Analysis Which capital budgeting projects are preferred? Select one: a. Lower payback period b. None of the option c. Higher payback period d. Lower cash inflow projects e. Average payback periodWhich of the statements below is TRUE regarding capital budgeting? O A. Capital budgeting deals with how much to apportion spending on current assets. O B. Projects with NPVS greater than the IRR should be accepted. OC. We can find a project's NPV by simply taking the product of all of the project's undiscounted cash flows. O D. Ceteris paribus, a lower cost of capital would increase a project's NPV.The Modified Internal Rate of Return (MIRR) is based on: O a Reinvestment rate, financing rate, and the number of periods Only the reinvestment rate of the project's cash flows Neither of the aforementioned variables Only the financing rate of the project's cash flows