D076 Unit 6 EXAMS ALREADY VERIFIED
Net Present Value (NPV) - ✔✔✔the sum (or net) of the present values of all of the project's expected
cash inflows and outflows.
Advantages of NPV - ✔✔✔Considers time value of money
Calculates value added to the firm
Considers risk and required return
Disadvantages of NPV - ✔✔✔Requires calculation of appropriate cost of capital
Is not useful to compare projects of varying sizes
Internal Rate of Return (IRR) - ✔✔✔The rate of return that a firm earns on its capital projects.
Hurdle Rate - ✔✔✔The required rate of return that a company expects to earn in order to consider a
project.
Advantages of IRR - ✔✔✔is easy to interpret,
considers time value of money, and
does not require use of required rate of return.
Disadvantages of IRR - ✔✔✔is not a good indicator of the amount of value created,
ignores mutually exclusive projects,
assumes reinvestment at the IRR rate,
cannot be used to compare projects with different durations, and
requires conventional cash flows.
, Capital Constrained Environment - ✔✔✔When a limited amount of funds are available.
Mutually Exclusive - ✔✔✔When two or more events do not coincide.
Profitability Index (PI) - ✔✔✔The ratio of payoff to investment for a proposed project.
Advantages of PI - ✔✔✔Considers the time value of money
Takes into account the risk of future cash flows through the cost of capital
Includes all future cash flows
Indicates whether an investment will create value for the company
Disadvantages of PI - ✔✔✔requires calculation of cost of capital and
is not useful for mutually exclusive projects.
Fixed Income Securities - ✔✔✔Another name for bonds; a financial security in which the borrower
pays a fixed interest payment to investors each year.
Coupon Rate - ✔✔✔The stated interest rate of a bond; also known as coupon yield.
Par Value - ✔✔✔The sum of money that a corporation promises to pay at the expiration of a bond;
also called face value.
Maturity Date - ✔✔✔The date at which a bond expires.
Yield to Maturity - ✔✔✔The rate of return that investors receive on a bond if they purchase a bond
today at the market price and hold it until it matures; the required rate of return given the maturity and
risk of the bond.
Net Present Value (NPV) - ✔✔✔the sum (or net) of the present values of all of the project's expected
cash inflows and outflows.
Advantages of NPV - ✔✔✔Considers time value of money
Calculates value added to the firm
Considers risk and required return
Disadvantages of NPV - ✔✔✔Requires calculation of appropriate cost of capital
Is not useful to compare projects of varying sizes
Internal Rate of Return (IRR) - ✔✔✔The rate of return that a firm earns on its capital projects.
Hurdle Rate - ✔✔✔The required rate of return that a company expects to earn in order to consider a
project.
Advantages of IRR - ✔✔✔is easy to interpret,
considers time value of money, and
does not require use of required rate of return.
Disadvantages of IRR - ✔✔✔is not a good indicator of the amount of value created,
ignores mutually exclusive projects,
assumes reinvestment at the IRR rate,
cannot be used to compare projects with different durations, and
requires conventional cash flows.
, Capital Constrained Environment - ✔✔✔When a limited amount of funds are available.
Mutually Exclusive - ✔✔✔When two or more events do not coincide.
Profitability Index (PI) - ✔✔✔The ratio of payoff to investment for a proposed project.
Advantages of PI - ✔✔✔Considers the time value of money
Takes into account the risk of future cash flows through the cost of capital
Includes all future cash flows
Indicates whether an investment will create value for the company
Disadvantages of PI - ✔✔✔requires calculation of cost of capital and
is not useful for mutually exclusive projects.
Fixed Income Securities - ✔✔✔Another name for bonds; a financial security in which the borrower
pays a fixed interest payment to investors each year.
Coupon Rate - ✔✔✔The stated interest rate of a bond; also known as coupon yield.
Par Value - ✔✔✔The sum of money that a corporation promises to pay at the expiration of a bond;
also called face value.
Maturity Date - ✔✔✔The date at which a bond expires.
Yield to Maturity - ✔✔✔The rate of return that investors receive on a bond if they purchase a bond
today at the market price and hold it until it matures; the required rate of return given the maturity and
risk of the bond.
