Finance Conceptual Chapter 9

The difference between the present value of an investment and its cost is the:

a. net present value.

The process of valuing an investment by determining the present value of its future cash flows is called (the):

b. discounted cash flow valuation.

Which one of the following statements concerning net present value (NPV) is correct?

c. An investment should be accepted if the NPV is positive and rejected if it is negative.

The length of time required for an investment to generate cash flows sufficient to recover the initial cost of the investment is called the:

c. payback period.

Which one of the following statements is correct concerning the payback period?

a. An investment is acceptable if its calculated payback period is less than some pre-specified period of time.

The length of time required for a project’s discounted cash flows to equal the initial cost of the project is called the:

e. discounted payback period.

The discounted payback rule states that you should accept projects:

d. if the discounted payback period is less than some pre-specified period of time.

The discount rate that makes the net present value of an investment exactly equal to zero is called the:

b. internal rate of return.

An investment is acceptable if its IRR:

d. exceeds the required return.

The possibility that more than one discount rate will make the NPV of an investment equal to zero is called the ___ problem.

e. multiple rates of return.

A situation in which accepting one investment prevents the acceptance of another investment is called the:

c. mutually exclusive investment decision.

An investment is acceptable if the profitability index (PI) of the investment is:

a. greater than one.