Quiz Ch 05 – Optimal Use of Profitability Index
Principles of Corporate Finance
Brealey, Myers, and Allen
13th Edition
In which situation is the profitability index most effectively utilized?
In which situation is the profitability index most effectively utilized?
True or false: Expenses related to decommissioning and clean-up in a project are commonly considered insignificant and can usually be disregarded.
True or false: Accounting earnings obtained from a company’s income statement, following generally accepted accounting principles (GAAP), are typically the most appropriate data for determining a project’s NPV.
True or false: The internal rate of return (IRR) is the discount rate that results in a net present value of zero for a project’s cash inflows.
True or false: The discounted payback method adjusts for the time value of money by discounting cash flows at the opportunity cost of capital before determining the payback period.
True or false: The discounted payback method consistently dismisses projects with negative NPV.
True or false: The discounted payback method entails determining the payback period and subsequently applying a discount to it based on the opportunity cost of capital.
True or false: The benefit-cost ratio does equate to the profitability index plus one.
True or false: The internal rate of return is the discount rate that results in a net present value of zero for a project’s cash flows.
True or false: The payback rule dismisses all cash flows that occur beyond the defined cut-off date.