"Most firms use only one measure of a project's attractiveness." True or false? (page 117)
"Payback gives too much weight to cash flows that occur after the cut-off date." True or false? (page 120)
How is the discounted payback period calculated? Does discounted payback solve the deficiencies of the payback rule? (page 121)
What is the book rate of return? Why is it not an accurate measure of the value of an investment project? (page 120-121)
Define the internal rate of return. (page 121-122)
Suppose that 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 122-123)
You have to choose between the following two investments.
Invest $1 million today and receive $2 million after one year, a 100 percent return, or
Invest $1 million today and receive $300,000 a year forever, a 30 percent return.
If the cost of capital is 10 percent, which would you choose? (page 127)
Explain how the IRR rule can be adapted to give the correct choice between the two projects in Concept Question 7. (page 127)
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 129-130)
What is the difference between hard and soft capital rationing? Does soft rationing mean that the manager should stop trying to maximize NPV? How about hard rationing? (page 133)
NPVs are additive (i.e., NPV(A + B) = NPV=(A) + NPV(B)). What are the implications of this property? Do the other measures discussed in this chapter have the same property? (page 118)
