NPV
Discount Rate
What is the rate at which future cash flows are discounted to determine the present value?
Discount rate which results in the NPV equaling zero
What is the IRR?
The time required to recover the initial cash investment in a project.
What is the Payback Period?
Appropriate discount rate
What is the rate that corresponds to the riskiness of the cash flows?
interest rate, discount rate, required rate of return, cost of capital
What are synonyms when discounting cash flows?
The difference between the initial cost of an investment and the present value of future cash flows.
What is Net Present Value?
Trial and error, financial calculator, excel
What are three methods for determining IRR?
Ignores the time value of money
What is a major weakness of the Payback Rule?
Investment rule that is a kind of "breakeven"measure.
What is Payback Period?
Average Net Income/Average Book Value
What is Average Accounting Return?
The acceptance criterion for NPV analysis.
What is a positive net present value
Situation in which there are two or more IRRs that result in a NPV equal to zero.
What is multiple changes in the sign of cash flows in an investment analysis?
Ease of use/calculation, convenience
What are reasons that the Payback Rule is used to assess investment projects?
An investment project that has a higher appropriate discount rate
What is a riskier project?
The process of determining which long term investments a firm should make.
What is capital budgeting?
One of two mutually exclusive investments with the higher NPV.
What is the preferred project?
IRR acceptance criterion
IRR exceeds the required rate of return
Bias towards liquidity
What is a characteristic of the Payback Rule?
A small change in discount rate results in a large change in NPV.
What is a reason to reconsider a project?
MIRR
What is modified internal rate of return?
The discount rate at which two projects have the same NPV.
What is the crossover rate?
Mutually exclusive investment decisions.
What is a situation where IRR analysis may not provide the correct answer?
Short term, smaller projects
What kind of projects is the Payback Rule most often used to evaluate?
A project with a long Payback Period, low AAR and positive NPV
What are conflicting investments signals?
A reason that a firm may not pursue an investment project with a positive NPV.
What are capital constraints?