Finance: NPV and IRR – Flashcards
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The difference between the present value of an investment and its cost is the:
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net present value.
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Which one of the following statements concerning net present value (NPV) is correct?
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An investment should be accepted if the NPV is positive and rejected if it is negative.
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The length of time required for an investment to generate cash flows sufficient to recover the initial cost of the investment is called the:
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payback period.
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The length of time required for a project's discounted cash flows to equal the initial cost of the project is called the:
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discounted payback period.
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The discount rate that makes the net present value of an investment exactly equal to zero is called the:
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internal rate of return.
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An investment is acceptable if its IRR:
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exceeds the required return.
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A situation in which accepting one investment prevents the acceptance of another investment is called the:
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mutually exclusive investment decision.
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The present value of an investment's future cash flows divided by the initial cost of the investment is called the:
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profitability index.
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An investment is acceptable if the profitability index (PI) of the investment is:
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greater than one.
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All else constant, the net present value of a typical investment project increases when:
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the rate of return decreases.
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Net present value:
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is more useful to decision makers than the internal rate of return when comparing different sized projects.
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The internal rate of return is:
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difficult to compute without the use of either a financial calculator or a computer.
