Exam 10: The Basics of Capital Budgeting: Evaluating Cash Flows

Carolina Company is considering Projects S and L, whose cash flows are shown below.These projects are mutually exclusive, equally risky, and are not repeatable.If the decision is made by choosing the project with the higher IRR, how much value will be forgone? Note that under some conditions choosing projects on the basis of the IRR will cause $0.00 value to be lost. r: 7.75\% Year 0 1 2 3 4 -\ 1,050 \ 675 \ 650 -\ 1,050 \ 360 \ 360 \ 360 \ 360

Assuming that their NPVs based on the firm's cost of capital are equal, the NPV of a project whose cash flows accrue relatively rapidly will be more sensitive to changes in the discount rate than the NPV of a project whose cash flows come in later in its life.

Pet World is considering a project that has the following cash flow data.What is the project's IRR? Note that a project's IRR can be less than the cost of capital (and even negative), in which case it will be rejected. Year 0 1 2 3 4 5 Cash flows -\ 9,500 \ 2,000 \ 2,025 \ 2,050 \ 2,075 \ 2,100

Silverman Co.is considering Projects S and L, whose cash flows are shown below.These projects are mutually exclusive, equally risky, and not repeatable.If the decision is made by choosing the project with the higher MIRR rather than the one with the higher NPV, how much value will be forgone? Note that under some conditions choosing projects on the basis of the MIRR will cause $0.00 value to be lost. r: 8.75\% Year 0 1 2 3 4 -\ 1,100 \ 375 \ 375 \ 375 \ 375 -\ 2,200 \ 725 \ 725 \ 725 \ 725

A basic rule in capital budgeting is that if a project's NPV exceeds its IRR, then the project should be accepted.

Martin Manufacturing is considering two normal, equally risky, mutually exclusive, but not repeatable projects.Martin's cost of capital is 10%.The two projects have the same investment costs, but Project A has an IRR of 15%, while Project B has an IRR of 20%.Assuming the projects' NPV profiles cross in the upper right quadrant, which of the following statements is CORRECT?

The IRR of normal Project X is greater than the IRR of normal Project Y, and both IRRs are greater than zero.Also, the NPV of X is greater than the NPV of Y at the cost of capital.If the two projects are mutually exclusive, Project X should definitely be selected, and the investment made, provided we have confidence in the data.Put another way, it is impossible to draw NPV profiles that would suggest not accepting Project X.

Farmer Co.is considering Projects S and L, whose cash flows are shown below.These projects are mutually exclusive, equally risky, and not repeatable.If the decision is made by choosing the project with the shorter payback, some value may be forgone.How much value will be lost in this instance? Note that under some conditions choosing projects on the basis of the shorter payback will not cause value to be lost. =10.25\% Year 0 1 2 3 4 -\ 950 \ 500 \ 800 \ 0 \ 0 -\ 2,100 \ 400 \ 800 \ 800 \ 1,000

Nichols Inc.is considering a project that has the following cash flow data.What is the project's IRR? Note that a project's IRR can be less than the cost of capital or negative, in both cases it will be rejected. Year 0 1 2 3 4 5 Cash flows -\ 1,250 \ 325 \ 325 \ 325 \ 325 \ 325

Which of the following statements is NOT a disadvantage of the regular payback method?

Yoga Center Inc.is considering a project that has the following cash flow and cost of capital (r) data.What is the project's NPV? Note that a project's expected NPV can be negative, in which case it will be rejected. : 14.00\% Year 0 1 2 3 4 Cash flows -\ 1,200 \ 400 \ 425 \ 450 \ 475

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

You are considering two mutually exclusive, equally risky, projects.Both have IRRs that exceed the cost of capital.Which of the following statements is CORRECT? Assume that the projects have normal cash flows, with one outflow followed by a series of inflows.

Scott Enterprises is considering a project that has the following cash flow and cost of capital (r) data.What is the project's NPV? Note that if a project's expected NPV is negative, it should be rejected. : 11.00\% Year 0 1 2 3 4 Cash flows -\ 1,000 \ 350 \ 350 \ 350 \ 350

Wiley's Wire Products is considering a project that has the following cash flow and cost of capital (r) data.What is the project's MIRR? Note that a project's MIRR can be less than the cost of capital (and even negative), in which case it will be rejected. =11.00\% Year 0 1 2 3 Cash flows -\ 800 \ 350 \ 350 \ 350

Kiley Electronics is considering a project that has the following cash flow data.What is the project's IRR? Note that a project's IRR can be less than the cost of capital (and even negative), in which case it will be rejected. Year 0 1 2 3 Cash flows -\ 1,100 \ 450 \ 470 \ 490

Which of the following statements is CORRECT?

Project S has a pattern of high cash flows in its early life, while Project L has a longer life, with large cash flows late in its life.Neither has negative cash flows after Year 0, and at the current cost of capital, the two projects have identical NPVs.Now suppose interest rates and money costs decline.Other things held constant, this change will cause L to become preferred to S.

Watts Co.is considering a project that has the following cash flow and cost of capital (r) data.What is the project's MIRR? Note that a project's MIRR can be less than the cost of capital (and even negative), in which case it will be rejected. r=10.00\% Year 0 1 2 3 4 Cash flows -\ 850 \ 300 \ 320 \ 340 \ 360