FIN 301 Exam 3 Questions with Latest
Update
Net Present Value Definition - Answer-Incremental or marginal net value created by
undertaking a project
Net Present Value Decision Rule - Answer-1) If the NPV is positive, accept the project
2) Most reliable method to compare and evaluate projects
A positive NPV is expected to..? - Answer-* add value to the firm, and therefore
increase the wealth of the owners
* NPV directly measures the increase in value to the firm
Advantages to using the payback period approach? - Answer-1) Easy to understand
2) Adjusts for uncertainty of later cash flows
3) Biased toward liquidity
Disadvantages to using the payback period approach? - Answer-1) Ignores the time
value of money
2) Requires an arbitrary cutoff point
3) Ignores cash flows beyond the cutoff date
4) Biased against long-term projects, such as research and development, and new
projects
Calculate payback period - Answer-Initial cost - cash flows
Advantages to using a discounted payback period approach? - Answer-1) Includes time
value of money
2) Easy to understand
3) Does not accept negative estimated NPV investments when all future cash flows are
positive
4) Biased towards liquidity
Disadvantages to using a discounted payback period approach? - Answer-1) May reject
positive NPV investments
2) Requires an arbitrary cutoff point
3) Ignores cash flows beyond the cutoff point
4) Biased against long-term projects, such as R&D and new products
Average accounting return definition - Answer-* There are many different definitions for
average accounting return
* The one used in the book is Average net income / average book value
* Need to have a target cutoff rate
Update
Net Present Value Definition - Answer-Incremental or marginal net value created by
undertaking a project
Net Present Value Decision Rule - Answer-1) If the NPV is positive, accept the project
2) Most reliable method to compare and evaluate projects
A positive NPV is expected to..? - Answer-* add value to the firm, and therefore
increase the wealth of the owners
* NPV directly measures the increase in value to the firm
Advantages to using the payback period approach? - Answer-1) Easy to understand
2) Adjusts for uncertainty of later cash flows
3) Biased toward liquidity
Disadvantages to using the payback period approach? - Answer-1) Ignores the time
value of money
2) Requires an arbitrary cutoff point
3) Ignores cash flows beyond the cutoff date
4) Biased against long-term projects, such as research and development, and new
projects
Calculate payback period - Answer-Initial cost - cash flows
Advantages to using a discounted payback period approach? - Answer-1) Includes time
value of money
2) Easy to understand
3) Does not accept negative estimated NPV investments when all future cash flows are
positive
4) Biased towards liquidity
Disadvantages to using a discounted payback period approach? - Answer-1) May reject
positive NPV investments
2) Requires an arbitrary cutoff point
3) Ignores cash flows beyond the cutoff point
4) Biased against long-term projects, such as R&D and new products
Average accounting return definition - Answer-* There are many different definitions for
average accounting return
* The one used in the book is Average net income / average book value
* Need to have a target cutoff rate
