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Chapter 7: Investment Decision Rules

Review Questions

  1. How is the NPV rule related to the goal of maximizing shareholder wealth?
  2. What is the intuition behind the payback rule? What are some of its drawbacks?
  3. What is the intuition behind the IRR rule? What are some of its drawbacks?
  4. Under what conditions will the IRR rule and the NPV rule give the same accept/reject decision?
  5. When is it possible to have multiple IRR's?
  6. How does the MIRR solve the problem of multiple IRRs?
  7. Why is it generally a bad idea to use IRR to choose between mutually exclusive projects?
  8. When should you use the equivalent annual annuity?
  9. What is the intuition behind the profitability index?





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