Question 1

Which of the following statements best describes normal cash flows?

Accepted Answer

A)  Projects with "normal" cash flows can have only one real IRR. 
B)  Projects with "normal" cash flows can have two or more real IRRs. 
C)  The "multiple IRR problem" can arise if a project's cash flows are "normal." 
D)  Projects with "non-normal" cash flows are almost never encountered in the real world. 
A)  Projects with "normal" cash flows can have only one real IRR. 
B)  Projects with "normal" cash flows can have two or more real IRRs. 
C)  The "multiple IRR problem" can arise if a project's cash flows are "normal." 
D)  Projects with "non-normal" cash flows are almost never encountered in the real world.

Question 2

Projects S and L are equally risky, mutually exclusive, and have normal cash flows. Project S has an IRR of 15%, while Project L's IRR is 12%. The two projects have the same NPV when the WACC is
7%) Which of the following statements is correct?

Accepted Answer

A)  If the WACC is 10%, both projects will have positive NPVs. 
B)  If the WACC is 6%, Project S will have the higher NPV. 
C)  If the WACC is 13%, Project S will have the lower NPV. 
D)  If the WACC is 10%, both projects will have a negative NPV. 
A)  If the WACC is 10%, both projects will have positive NPVs. 
B)  If the WACC is 6%, Project S will have the higher NPV. 
C)  If the WACC is 13%, Project S will have the lower NPV. 
D)  If the WACC is 10%, both projects will have a negative NPV.

Question 3

Pappas Products is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. The CEO believes the IRR is the best selection criterion, while the CFO advocates the MIRR. If the decision is made by choosing the project with the higher IRR rather than the one with the higher MIRR, how much, if any, value will be forgone? Note that under some conditions the choice will have no effect on the value gained or lost.

Accepted Answer

A)  -$1.60 
B)  -$1.44 
C)  -$1.30 
D)  $0.00 
A)  -$1.60 
B)  -$1.44 
C)  -$1.30 
D)  $0.00

Question 4

Which of the following statements is correct?

Accepted Answer

A)  For a project with normal cash flows, any change in the WACC will change both the NPV and the IRR. 
B)  To find the MIRR, we first compound cash flows at the regular IRR to find the TV, and then we discount the TV at the WACC to find the PV. 
C)  The NPV and IRR methods both assume cash flows can be reinvested at the WACC. However, the MIRR method assumes reinvestment at the MIRR itself. 
D)  If two projects have the same cost, and if their NPV profiles cross in the upper right quadrant, then the project with the LOWER IRR probably has more of its cash flows coming in the later years. 
A)  For a project with normal cash flows, any change in the WACC will change both the NPV and the IRR. 
B)  To find the MIRR, we first compound cash flows at the regular IRR to find the TV, and then we discount the TV at the WACC to find the PV. 
C)  The NPV and IRR methods both assume cash flows can be reinvested at the WACC. However, the MIRR method assumes reinvestment at the MIRR itself. 
D)  If two projects have the same cost, and if their NPV profiles cross in the upper right quadrant, then the project with the LOWER IRR probably has more of its cash flows coming in the later years.

Question 5

A decrease in the firm's discount rate (r, or WACC) will INCREASE projects' NPVs, which could change the accept/reject decision for any potential project. However, such a change would have no impact on the project's IRR; therefore, the accept/reject decision under the IRR method is independent of the cost of capital.

Accepted Answer

A) True 
 B)False

Question 6

Hindelang Inc. is considering a project that has the following cash flow and WACC data. What is the project's MIRR? Note that a project's projected MIRR can be less than the WACC (and even negative), in which case it will be rejected.

Accepted Answer

A)  12.61% 
B)  14.01% 
C)  15.41% 
D)  16.95% 
A)  12.61% 
B)  14.01% 
C)  15.41% 
D)  16.95%

Question 7

If the IRR of normal Project X is greater than the IRR of mutually exclusive Project Y (also normal), we can conclude that the firm should select X rather than Y if X has NPV > 0.

Accepted Answer

A) True 
 B)False

Question 8

Edelman Electric Systems is considering a project that has the following cash flow and WACC data. What is the project's MIRR? Note that a project's projected MIRR can be less than the WACC (and even negative), in which case it will be rejected.

Accepted Answer

A)  9.58% 
B)  10.64% 
C)  11.82% 
D)  13.14% 
A)  9.58% 
B)  10.64% 
C)  11.82% 
D)  13.14%

Question 9

Johnson Enterprises is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that if a project's projected NPV is negative, it should be rejected.

Accepted Answer

A)  $98.78 
B)  $103.98 
C)  $109.45 
D)  $114.93 
A)  $98.78 
B)  $103.98 
C)  $109.45 
D)  $114.93

Question 10

Conflicts between two mutually exclusive projects, where the NPV method chooses one project but the IRR method chooses the other, should generally be resolved in favour of the project with the higher NPV.

Accepted Answer

A) True 
 B)False

Question 11

Scanlon Inc. 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 IRR, how much value will be forgone? Note that under certain conditions, choosing projects on the basis of the IRR will not cause any value to be lost because the one with the higher IRR will also have the higher NPV, so no value will be lost if the IRR method is used.

Accepted Answer

A)  $146.59 
B)  $154.30 
C)  $162.42 
D)  $178.67 
A)  $146.59 
B)  $154.30 
C)  $162.42 
D)  $178.67

Question 12

One advantage of the payback method for evaluating potential investments is that it provides some information about a project's liquidity and risk.

Accepted Answer

A) True 
 B)False

Question 13

If you were evaluating two mutually exclusive projects for a firm with a zero cost of capital, the payback method and NPV method would always lead to the same decision on which project to undertake.

Accepted Answer

A) True 
 B)False

Question 14

Thompson Stores is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's projected IRR can be less than the WACC (and even negative), in which case it will be rejected. Year: 0 1 2 3 4 5
Cash flows: -$1,000$300 $295 $290 $285 $270

Accepted Answer

A)  11.16% 
B)  12.40% 
C)  13.78% 
D)  15.16% 
A)  11.16% 
B)  12.40% 
C)  13.78% 
D)  15.16%

Question 15

Wells Inc. is considering a project that has the following cash flow data. What is the project's payback?

Accepted Answer

A)  1.62 years 
B)  1.80 years 
C)  2.00 years 
D)  2.20 years 
A)  1.62 years 
B)  1.80 years 
C)  2.00 years 
D)  2.20 years

Question 16

Which of the following statements is correct?

Accepted Answer

A)  One advantage of the NPV over the IRR is that NPV takes account of cash flows over a project's full life whereas IRR does not. 
B)  One advantage of the NPV over the IRR is that NPV assumes that cash flows will be reinvested at the WACC, whereas IRR assumes that cash flows are reinvested at the IRR. The NPV assumption is generally more likely to be appropriate. 
C)  One advantage of the NPV over the MIRR method is that NPV takes account of cash flows over a project's full life whereas MIRR does not. 
D)  One advantage of the NPV over the MIRR method is that NPV discounts cash flows whereas the MIRR is based on undiscounted cash flows. 
A)  One advantage of the NPV over the IRR is that NPV takes account of cash flows over a project's full life whereas IRR does not. 
B)  One advantage of the NPV over the IRR is that NPV assumes that cash flows will be reinvested at the WACC, whereas IRR assumes that cash flows are reinvested at the IRR. The NPV assumption is generally more likely to be appropriate. 
C)  One advantage of the NPV over the MIRR method is that NPV takes account of cash flows over a project's full life whereas MIRR does not. 
D)  One advantage of the NPV over the MIRR method is that NPV discounts cash flows whereas the MIRR is based on undiscounted cash flows.

Question 17

Other things held constant, an INCREASE in the cost of capital will result in a DECREASE in a project's IRR.

Accepted Answer

A) True 
 B)False

Question 18

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.

Accepted Answer

A)  The longer a project's payback period, the more desirable the project is normally considered to be by this criterion. 
B)  One drawback of the payback criterion for evaluating projects is that this method does not properly account for the time value of money. 
C)  If a project's payback is positive, then the project should be rejected because it must have a negative NPV. 
D)  The regular payback ignores cash flows beyond the payback period, but the discounted payback method overcomes this problem. 
A)  The longer a project's payback period, the more desirable the project is normally considered to be by this criterion. 
B)  One drawback of the payback criterion for evaluating projects is that this method does not properly account for the time value of money. 
C)  If a project's payback is positive, then the project should be rejected because it must have a negative NPV. 
D)  The regular payback ignores cash flows beyond the payback period, but the discounted payback method overcomes this problem.

Question 19

A firm is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. The CEO wants to use the IRR criterion, while the CFO favours the NPV method, and you were hired to advise the firm on the best procedure. If the CEO's preferred criterion is used, how much value will the firm lose as a result of this decision?

Accepted Answer

A)  $5.83 
B)  $6.14 
C)  $6.46 
D)  $6.79 
A)  $5.83 
B)  $6.14 
C)  $6.46 
D)  $6.79

Question 20

Normal Projects Q and R have the same NPV when the discount rate is zero. However, Project Q's cash flows come in faster than those of R. Therefore, we know that at any discount rate greater than zero, R will have a higher NPV than Q.

Accepted Answer

A) True 
 B)False

Which of the following statements best describes normal cash flows?

Projects S and L are equally risky, mutually exclusive, and have normal cash flows. Project S has an IRR of 15%, while Project L's IRR is 12%. The two projects have the same NPV when the WACC is 7%) Which of the following statements is correct?

Which of the following statements is correct?

Hindelang Inc. is considering a project that has the following cash flow and WACC data. What is the project's MIRR? Note that a project's projected MIRR can be less than the WACC (and even negative), in which case it will be rejected.

If the IRR of normal Project X is greater than the IRR of mutually exclusive Project Y (also normal), we can conclude that the firm should select X rather than Y if X has NPV > 0.

Edelman Electric Systems is considering a project that has the following cash flow and WACC data. What is the project's MIRR? Note that a project's projected MIRR can be less than the WACC (and even negative), in which case it will be rejected.

Johnson Enterprises is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that if a project's projected NPV is negative, it should be rejected.

Conflicts between two mutually exclusive projects, where the NPV method chooses one project but the IRR method chooses the other, should generally be resolved in favour of the project with the higher NPV.

One advantage of the payback method for evaluating potential investments is that it provides some information about a project's liquidity and risk.

If you were evaluating two mutually exclusive projects for a firm with a zero cost of capital, the payback method and NPV method would always lead to the same decision on which project to undertake.

Thompson Stores is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's projected IRR can be less than the WACC (and even negative), in which case it will be rejected. Year: 0 1 2 3 4 5 Cash flows: -$1,000$300 $295 $290 $285 $270

Wells Inc. is considering a project that has the following cash flow data. What is the project's payback?

Which of the following statements is correct?

Other things held constant, an INCREASE in the cost of capital will result in a DECREASE in a project's IRR.

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.

Normal Projects Q and R have the same NPV when the discount rate is zero. However, Project Q's cash flows come in faster than those of R. Therefore, we know that at any discount rate greater than zero, R will have a higher NPV than Q.

Overview of Financial Management and the Financial Environment

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Financial Planning and Forecasting Financial Statements

Bonds, Bond Valuation, and Interest Rates

Risk, Return, and the Capital Asset Pricing Model

Stocks, Stock Valuation, and Stock Market Equilibrium

The Cost of Capital

Cash Flow Estimation and Risk Analysis

Capital Structure Decisions

Distributions to Shareholders: Dividends and Repurchases

Initial Public Offerings, Investment Banking, and Financial Restructuring

Lease Financing

Capital Market Financing: Hybrid and Other Securities

Working Capital Management and Short-Term Financing

Current Asset Management

Financial Options and Applications in Corporate Finance

Decision Trees, Real Options, and Other Capital Budgeting Techniques

Derivatives and Risk Management

International Financial Management

Corporate Valuation, Value-Based Management, and Corporate Governance

Mergers, Acquisitions, and Restructuring

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

Which of the following statements best describes normal cash flows?

Projects S and L are equally risky, mutually exclusive, and have normal cash flows. Project S has an IRR of 15%, while Project L's IRR is 12%. The two projects have the same NPV when the WACC is 7%) Which of the following statements is correct?

Which of the following statements is correct?

Hindelang Inc. is considering a project that has the following cash flow and WACC data. What is the project's MIRR? Note that a project's projected MIRR can be less than the WACC (and even negative), in which case it will be rejected.

If the IRR of normal Project X is greater than the IRR of mutually exclusive Project Y (also normal), we can conclude that the firm should select X rather than Y if X has NPV > 0.

Edelman Electric Systems is considering a project that has the following cash flow and WACC data. What is the project's MIRR? Note that a project's projected MIRR can be less than the WACC (and even negative), in which case it will be rejected.

Johnson Enterprises is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that if a project's projected NPV is negative, it should be rejected.

Conflicts between two mutually exclusive projects, where the NPV method chooses one project but the IRR method chooses the other, should generally be resolved in favour of the project with the higher NPV.

One advantage of the payback method for evaluating potential investments is that it provides some information about a project's liquidity and risk.

If you were evaluating two mutually exclusive projects for a firm with a zero cost of capital, the payback method and NPV method would always lead to the same decision on which project to undertake.

Thompson Stores is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's projected IRR can be less than the WACC (and even negative), in which case it will be rejected. Year: 0 1 2 3 4 5 Cash flows: -$1,000$300 $295 $290 $285 $270

Wells Inc. is considering a project that has the following cash flow data. What is the project's payback?

Which of the following statements is correct?

Other things held constant, an INCREASE in the cost of capital will result in a DECREASE in a project's IRR.

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.

Normal Projects Q and R have the same NPV when the discount rate is zero. However, Project Q's cash flows come in faster than those of R. Therefore, we know that at any discount rate greater than zero, R will have a higher NPV than Q.

Overview of Financial Management and the Financial Environment

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Financial Planning and Forecasting Financial Statements

Bonds, Bond Valuation, and Interest Rates

Risk, Return, and the Capital Asset Pricing Model

Stocks, Stock Valuation, and Stock Market Equilibrium

The Cost of Capital

Cash Flow Estimation and Risk Analysis

Capital Structure Decisions

Distributions to Shareholders: Dividends and Repurchases

Initial Public Offerings, Investment Banking, and Financial Restructuring

Lease Financing

Capital Market Financing: Hybrid and Other Securities

Working Capital Management and Short-Term Financing

Current Asset Management

Financial Options and Applications in Corporate Finance

Decision Trees, Real Options, and Other Capital Budgeting Techniques

Derivatives and Risk Management

International Financial Management

Corporate Valuation, Value-Based Management, and Corporate Governance

Mergers, Acquisitions, and Restructuring

Filters