Exam 2 Cheat Sheet
The net present value (NPV) rule can be best stated as: An investment should be accepted if the NPV is positive and rejected if it is negative.
The discount rate that makes the net present value of investment exactly equal to zero is b. Internal rate of return.
Which of the following statements is true? If the financial manager relies on NPV in making capital budgeting decisions, she acts in the shareholders’ best interests.
Net present value is equal to zero when the interest rate used to discount cash flows equals the IRR
The decision rule is considered the “best” in principle net present value
An NPV of zero implies that an investment ______ is immaterial to the shareholder
You own some manufacturing equipment that must be replaced. Two different suppliers present a purchase and installation plan for your consideration. This is an example of a business decision involving projects. mutually exclusive
Consider a project with an initial investment and positive future cash flows. As the discount rate is decreased the IRR remains constant while the NPV increases
A project costs $300 and has cash flows of $75 for the first three years and $50 in each of the project’s last three years. If the discount rate is 15%, what is the discounted payback period The project never pays back on a discounted basis
Munster: Present Value = C * i $8 million = C .15 $8 = C *annuity factor (15%, 7 years) $8 = C *4.160 C = $8 / 4.160 =1.923 million Skilboro:
Present Value = C * i P.V = $500, 000 .15 = $2.50938 million
Payback Period
The discount rate that makes the net present value of investment exactly equal to zero is b. Internal rate of return.
Which of the following statements is true? If the financial manager relies on NPV in making capital budgeting decisions, she acts in the shareholders’ best interests.
Net present value is equal to zero when the interest rate used to discount cash flows equals the IRR
The decision rule is considered the “best” in principle net present value
An NPV of zero implies that an investment ______ is immaterial to the shareholder
You own some manufacturing equipment that must be replaced. Two different suppliers present a purchase and installation plan for your consideration. This is an example of a business decision involving projects. mutually exclusive
Consider a project with an initial investment and positive future cash flows. As the discount rate is decreased the IRR remains constant while the NPV increases
A project costs $300 and has cash flows of $75 for the first three years and $50 in each of the project’s last three years. If the discount rate is 15%, what is the discounted payback period The project never pays back on a discounted basis
Munster: Present Value = C * i $8 million = C .15 $8 = C *annuity factor (15%, 7 years) $8 = C *4.160 C = $8 / 4.160 =1.923 million Skilboro:
Present Value = C * i P.V = $500, 000 .15 = $2.50938 million
Payback Period