) IRR may produce multiple rates of return when cash flows are non-conventional. B) IRR is best used for comparing mutually exclusive projects. C) IRR is almost not used in the business world anymore D) IRR is mainly used to evaluate small projects

) IRR may produce multiple rates of return when cash flows are non-conventional. B) IRR is best used for comparing mutually exclusive projects. C) IRR is almost not used in the business world anymore D) IRR is mainly used to evaluate small projects

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter11: Cash Flow Estimation And Risk Analysis

Section11.1: Identifying Relevant Cash Flows

Problem 3ST

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Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

The internal rate of return (IRR) is defined as which of the following:
A) IRR may produce multiple rates of return when cash flows are non-conventional.
B) IRR is best used for comparing mutually exclusive projects.
C) IRR is almost not used in the business world anymore
D) IRR is mainly used to evaluate small projects.

Definition Definition Discount rate of a project wherein its net present value equals zero. Internal rate of return equates the present value of future cash flows with the initial investments. Internal rate of return helps to determine nominal cash flows.

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Which of the following statements is correct regarding the payback method? Takes account of differences in size among projects. If a project’s payback is positive, then the project should be accepted because it must have a zero NPV. Ignores cash flows beyond the payback period. Has an objective, market-determined benchmark for making decisions. Directly account for the time value of money.
which of the following statement is true>? 1. return on equity is the ratio of total assets to total net income 2. one must know the discount rate to compute the npv of a project but one can compute the IRR without referring to the discount rate. 3. there will always be one IRR regardless of cash flows 4. one must know the discount rate to compute the IRR of a project but one can compute the NPV without referring to the discount rate 5. payback accounts for time value of money
Differences between the ERR and the IRR include the following: a. The ERR will yield a unique solution (no multiple rates of return as in the IRR) b. In the ERR, funds recovered from the investment are assumed to earn returns equal to the MARR c. The ERR is always a value somewhere between the IRR and the MARR d. All of the above.
Net present value: is very similar in its methodology to the average accounting return. is the easiest method of evaluation for nonfinancial managers. cannot be applied when comparing mutually exclusive projects. is less useful than the internal rate of return when comparing different-sized projects. is the best method of analyzing mutually exclusive projects. OO O
Which of the following is a disadvantage of the IRR project evaluation method? Select one: a. It does not take into account the time value of money. b. If there are negative cash flows after positive cash flows, there may be zero or multiple internal rates of return. c. It does not make adequate allowance for risk. d. It focuses on accounting profit rather than cash flow as the source of value.
The profitability index O will never be greater than 1. O does not take into account the discounted cash flows. O allows comparison of the relative desirability of projects that require differing initial investments. O is calculated by dividing total cash flows by the initial investment.
Which of the following are significant flaws with the Payback Period Method? (Select all that apply) A. Biased against long-term projects B. Uses an arbitrary benchmark C. Very rarely used in practice D. Uses accounting profits rather than cash flows E. Ignores Time Value of Money
Which of the following is an advantage of Net present value? a. Investment potential ignored b. Useful in evaluating mutually exclusive projects c. Considers time value of money d. Easy to calculate
A disadvantage of using the accounting rate of return to evaluate investment alternatives is that Group of answer choices A. It is superior to IRR. B. When net incomes vary from year to year, the ARR will also vary across years, making the project seem desirable in one year and not another. C. It considers the time value of money. D. It is easy to understand and it allows comparison or projects. E. Using ARR has no disadvantages.
The ARR has one specific advantage not possessed by the payback period in that it a.considers the time value of money. b.measures the value added by a project. c.is always an accurate measure of profitability. d.is more widely accepted by financial managers. e.considers the profitability of a project beyond the payback period.
Which of the following statements is most CORRECT? A. Some projects with normal cash flows have multiple IRRs. B. The IRR method is flawed because it assumes reinvestment of the cash flows at the cost of capital. C. If two,mutually exclusive normal projects have the same size and life, MIRR and NPV may not agree as to which project will add the most value to the firm. D. The MIRR assumes that cash flows are reinvested at the project's k E Projects with nonnormal cash flows can have multiple MIRRs.
Which are problems of the payback criterion? Check all that apply: It ignores cash flows after the cutoff date. It ignores the time value of money. It doesn't show the value created by a project. It doesn't fully reflect the risk of a project. It uses an arbitrary cutoff value. It is difficult to calculate.