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Test Bank for Fundamentals of Corporate Finance Ch. 8 (6th edition by Jonathan Berk)
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Test Bank for Fundamentals of Corporate Finance Ch. 8 (6th edition by Jonathan Berk)
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Test Bank for Fundamentals ofCorporate Finance Ch. 8 (6th edition by
Jonathan Berk)
capital budgeting - ANSwhat long term investments should we make?
value - ANSwe create _____ by choosing an investment which is worth more in the market
place than it costs to acquire.
net present value (NPV) - ANSdifference between market value and cost
no serious problems
preferred decision criterion
net present values - ANSthe capital budgeting process can be described as a search for
investments with positive ____ _______ _______.
discounted cash flow (DCF) - ANSthe process of valuing an investment by discounting its future
cash flows
Arbitrary cutoff period
net present value - ANSan investment should be accepted if the _____ ______ _____ is
positive and rejected if it is negative
advantages of NPV - ANSuses cash flows
uses relevant cashflows
discounts cash flows properly
payback period - ANSLength of time until initial investment is recovered
Disadvantages
Doesn't look at TVM and has arbitrary cutoff period
ignores cf after payback period
biased against longterm projects
Advagntages:
biased towards liquidity
average accounting return (AAR) - ANSan investment's average net income divided by its
average book value
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