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

Projects S and L both have normal cash flows, and the projects have the same risk; hence, both are evaluated with the same WACC, 10%. However, S has a higher IRR than L. Which of the following statements is correct?

Which of the following statements best describes payback?

Which of the following statements best describes payback?

Sorenson Stores is considering a project that has the following cash flows: The project has a payback of 2.5 years, and the firm's cost of capital is 12%. What is the project's NPV?

The NPV method's assumption that cash inflows are reinvested at the cost of capital is more reasonable than the IRR's assumption that cash flows are reinvested at the IRR. This is an important reason that the NPV method is generally preferred over the IRR method.

Which of the following statements best describes an NPV profile graph?

Which of the following statements best describes normal cash flows?

Which of the following statements is correct? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.

Rappaport Enterprises is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that a project's projected NPV can be negative, in which case it will be rejected.

A company is choosing between two projects. The larger project has an initial cost of $100,000, annual cash flows of $30,000 for 5 years, and an IRR of 15.24%. The smaller project has an initial cost of $50,000, annual cash flows of $16,000 for 5 years, and an IRR of 16.63%. The projects are equally risky. Which of the following statements is correct?

Projects A and B are mutually exclusive and have normal cash flows. Project A has an IRR of 15% and Project B's IRR is 20%. The company's WACC is 12%, and at that rate Project A has the higher NPV. Which of the following statements is correct?

Babcock Inc. is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that a project's projected NPV can be negative, in which case it will be rejected.

Which of the following statements best describes the NPV?

Adler Enterprises is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that a project's projected NPV can be negative, in which case it will be rejected.

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.

Which of the following statements is correct? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.

Which of the following statements is correct?

Which of the following statements is correct? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.

Anderson Associates is considering two mutually exclusive projects that have the following cash flows: At what cost of capital do the two projects have the same NPV? (That is, what is the crossover rate?)

Which of the following statements is correct? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.