"Most firms use only one measure of a project's attractiveness." True or false? (page 87 of the book)
"Payback gives too much weight to cash flows that occur after the cut-off date." True or false? (page 90 of the book)
Your CEO insists that all projects should have a payback period of four years or less. As a result, attractive long-lived projects are being turned down. The CEO is willing to switch to a discounted payback with the same four-year cut-off period. Would this be an improvement? (page 90 of the book)
How is the discounted payback period calculated? Does discounted payback solve the deficiencies of the payback rule? (page 90 of the book)
What is the book rate of return? Why is it not an accurate measure of the value of an investment project? (page 88 of the book)
Define the internal rate of return. (page 91 of the book)
Suppose a project's NPV is higher if you increase the discount rate. Should you accept the project if the IRR is more than the cost of capital or if it is less? (page 93 of the book)
You have to choose between the following two investments.
Invest $1 million today and receive $2 million after one year, a 100% return, or
Invest $1 million today and receive $300,000 a year forever, a 30% return.
If the cost of capital is 10%, which would you choose? (page 96 of the book)
A company that ranks projects on IRR will encourage managers to propose projects with quick paybacks and low up-front investment. True or false? (page 99 of the book)
What is the difference between hard and soft capital rationing? Does soft rationing mean the manager should stop trying to maximize NPV? How about hard rationing? (page 102 of the book)
NPVs add up (i.e., NPV(A + B) = NPV(B)). What are the implications of this property? Do the other measures discussed in this chapter have the same property? (page 88 of the book)
