Podcast
Questions and Answers
What does a Profitability Index (PI) greater than 1 indicate?
What does a Profitability Index (PI) greater than 1 indicate?
- The investment is expected to generate more value than its cost. (correct)
- The investment is expected to generate less value than its cost.
- The investment will not generate any cash flow.
- The investment is expected to generate a return equal to its cost.
Which approach to calculating the Modified Internal Rate of Return (MIRR) involves considering both negative and positive cash flows?
Which approach to calculating the Modified Internal Rate of Return (MIRR) involves considering both negative and positive cash flows?
- Capital Budgeting Approach
- Combination Approach (correct)
- Discounting Approach
- Reinvestment Approach
Why might firms use multiple evaluation measures in capital budgeting?
Why might firms use multiple evaluation measures in capital budgeting?
- To assess investment reliability under uncertainty. (correct)
- To simplify decision making.
- To avoid the complexity of cash flow projections.
- To create a standard measure for all investments.
What is a limitation of using the Profitability Index (PI) in project evaluation?
What is a limitation of using the Profitability Index (PI) in project evaluation?
In the context of capital budgeting, which of the following is NOT a common procedure?
In the context of capital budgeting, which of the following is NOT a common procedure?
What is the primary issue with the NPV function in most spreadsheets?
What is the primary issue with the NPV function in most spreadsheets?
How is the payback period defined?
How is the payback period defined?
What is a significant limitation of the payback rule?
What is a significant limitation of the payback rule?
Why is the payback period rule seen as advantageous in some scenarios?
Why is the payback period rule seen as advantageous in some scenarios?
What does the discounted payback period take into account that the regular payback period does not?
What does the discounted payback period take into account that the regular payback period does not?
What limitation does the payback rule have regarding risk consideration?
What limitation does the payback rule have regarding risk consideration?
In the context of the payback rule, what does the term 'arbitrary cutoff' refer to?
In the context of the payback rule, what does the term 'arbitrary cutoff' refer to?
What key insight about liquidity does the payback rule highlight?
What key insight about liquidity does the payback rule highlight?
What does the net present value (NPV) measure?
What does the net present value (NPV) measure?
Which of the following is a step in estimating net present value?
Which of the following is a step in estimating net present value?
If the net present value of an investment is less than zero, what does it indicate?
If the net present value of an investment is less than zero, what does it indicate?
Which of the following is a shortcoming of the payback rule?
Which of the following is a shortcoming of the payback rule?
What is a significant advantage of the internal rate of return (IRR) criterion?
What is a significant advantage of the internal rate of return (IRR) criterion?
Which aspect of capital budgeting involves predicting whether an investment will create value?
Which aspect of capital budgeting involves predicting whether an investment will create value?
What issue may arise when using spreadsheet functions for capital budgeting decisions?
What issue may arise when using spreadsheet functions for capital budgeting decisions?
What is the modified internal rate of return (MIRR) primarily focused on?
What is the modified internal rate of return (MIRR) primarily focused on?
What is the key feature of the discounted payback period compared to the ordinary payback period?
What is the key feature of the discounted payback period compared to the ordinary payback period?
Which statement is TRUE regarding the relationship between discounted payback period and NPV?
Which statement is TRUE regarding the relationship between discounted payback period and NPV?
What is one major disadvantage of using the discounted payback period?
What is one major disadvantage of using the discounted payback period?
How is the average accounting return (AAR) defined?
How is the average accounting return (AAR) defined?
What is a critical disadvantage of using AAR for investment decisions?
What is a critical disadvantage of using AAR for investment decisions?
What does the internal rate of return (IRR) represent?
What does the internal rate of return (IRR) represent?
When should an investment be rejected based on IRR?
When should an investment be rejected based on IRR?
Which of the following advantages applies to the discounted payback period?
Which of the following advantages applies to the discounted payback period?
What does IRR represent in the context of investment calculations?
What does IRR represent in the context of investment calculations?
What is a major problem associated with using IRR for non-conventional cash flows?
What is a major problem associated with using IRR for non-conventional cash flows?
How can MIRR improve upon the shortcomings of IRR?
How can MIRR improve upon the shortcomings of IRR?
What is indicated when IRR is higher than the required return?
What is indicated when IRR is higher than the required return?
In the case of mutually exclusive investments, what issue arises from relying solely on IRR?
In the case of mutually exclusive investments, what issue arises from relying solely on IRR?
Which of the following best describes the NPV profile?
Which of the following best describes the NPV profile?
What does the Reinvestment Approach for calculating MIRR involve?
What does the Reinvestment Approach for calculating MIRR involve?
When cash inflows occur before cash outflows, what can be misleading about the IRR?
When cash inflows occur before cash outflows, what can be misleading about the IRR?
