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

Rivoli Roofing is considering mutually exclusive Projects A and B, which have the following cash flows: At what cost of capital would the two projects have the same NPV (NPV)?

Which of the following statements is correct?

Last month, Smith Systems Inc. decided to accept the project whose cash flows are shown below. However, before actually starting the project, the Bank of Canada took actions that lowered interest rates and therefore Smith's WACC. By how much did the change in the WACC affect the project's forecasted NPV? Assume that the Bank of Canada's action does not affect the cash flows, and note that a project's projected NPV can be negative, in which case it should be rejected.

Moerdyk & 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 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, i.e., no conflict will exist.

If a project's NPV exceeds its IRR, then the project should be accepted.

You are considering two mutually exclusive, equally risky, projects. Both have IRRs that exceed the WACC that is used to evaluate them. Which of the following statements is correct? Assume that the projects have normal cash flows, with one outflow followed by a series of inflows.

Sadik 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.

Nast 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 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.