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Questions and Answers
What is the primary decision firms face regarding investments?
What is the primary decision firms face regarding investments?
- How to allocate scarce resources
- How to reduce operational costs
- When to expand production capacity
- Where to invest capital (correct)
What does the Payback Period measure?
What does the Payback Period measure?
- The total profit generated over the investment's lifespan
- The time taken for cumulative cash flow to equal initial investment (correct)
- The actual rate of return on an investment
- The maximum amount a firm can invest in a project
Which of the following investment decision methods is considered cash-flow based?
Which of the following investment decision methods is considered cash-flow based?
- Average accounting return
- Return on equity
- Net Present Value (NPV) (correct)
- Price-to-earnings ratio
Which statement about the Payback Rule is correct?
Which statement about the Payback Rule is correct?
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What characterizes an annuity in the context of investments?
What characterizes an annuity in the context of investments?
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Study Notes
Investment Decisions
- Firms have limited resources and must carefully allocate capital.
- The payback period is the time it takes for an investment's cumulative cash flow to equal the initial investment.
- The payback rule involves choosing projects based on their payback period, either by targeting a specific timeframe or selecting projects with the shortest payback.
- An annuity is a financial product that provides constant cash flows over a specific period.
Investment Evaluation Methods
- Payback period, NPV, and IRR are cash-flow-based methods for evaluating investments.
- Average accounting return is a non-cash-flow-based method that relies on accounting data.
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