Question 1

Which of the following statements is CORRECT?

Accepted Answer

A)  The NPV method was once the favorite of academics and business executives, but today most authorities regard the MIRR as being the best indicator of a project's profitability. 
B)  If the cost of capital declines, this lowers a project's NPV. 
C)  The NPV method is regarded by most academics as being the best indicator of a project's profitability, hence most academics recommend that firms use only this one method and disregard other methods. 
D)  A project's NPV depends on the total amount of cash flows the project produces, but because the cash flows are discounted at the WACC, it does not matter if the cash flows occur early or late in the project's life. 
E)  The NPV and IRR methods may give different recommendations regarding which of two mutually exclusive projects should be accepted, but they always give the same recommendation regarding the acceptability of a normal, independent project. 
A)  The NPV method was once the favorite of academics and business executives, but today most authorities regard the MIRR as being the best indicator of a project's profitability. 
B)  If the cost of capital declines, this lowers a project's NPV. 
C)  The NPV method is regarded by most academics as being the best indicator of a project's profitability, hence most academics recommend that firms use only this one method and disregard other methods. 
D)  A project's NPV depends on the total amount of cash flows the project produces, but because the cash flows are discounted at the WACC, it does not matter if the cash flows occur early or late in the project's life. 
E)  The NPV and IRR methods may give different recommendations regarding which of two mutually exclusive projects should be accepted, but they always give the same recommendation regarding the acceptability of a normal, independent project. E

Question 2

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.

Accepted Answer

A) True 
 B)False  False

Question 3

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)  A project's MIRR is always greater than its regular IRR. 
B)  A project's MIRR is always less than its regular IRR. 
C)  If a project's IRR is greater than its WACC, then the MIRR will be less than the IRR. 
D)  If a project's IRR is greater than its WACC, then the MIRR will be greater than the IRR. 
E)  To find a project's MIRR, we compound cash inflows at the IRR and then discount the terminal value back to t = 0 at the WACC. 
A)  A project's MIRR is always greater than its regular IRR. 
B)  A project's MIRR is always less than its regular IRR. 
C)  If a project's IRR is greater than its WACC, then the MIRR will be less than the IRR. 
D)  If a project's IRR is greater than its WACC, then the MIRR will be greater than the IRR. 
E)  To find a project's MIRR, we compound cash inflows at the IRR and then discount the terminal value back to t = 0 at the WACC. C

Question 4

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. 
E)  Project S's NPV is more sensitive to changes in WACC than Project L's. 
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. 
E)  Project S's NPV is more sensitive to changes in WACC than Project L's.

Question 5

Sexton 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. WACC: $\quad 10.25 \%$
$\begin{array}{c}
\begin{array}{lll}
 \text {Year}\
 \text {CF}_{S} \
 \text {CF}_{L} 
\end{array}
\begin{array}{c}
 0 \
\hline -\$2,050\
-\$4,300
\end{array}
\begin{array}{c}
1 \
\hline \$750\
1,500
\end{array}
\begin{array}{c}
2 \
\hline \$760\
\$1,518
\end{array}
\begin{array}{c}
3 \
\hline \$770\
\$1,536
\end{array}
\begin{array}{c}
4 \
\hline \$780\
\$1,554
\end{array}
\end{array}$

a.$ \$134.79$
b. $\$ 141.89$
c. $\$ 149.36$
d.$ \$164.29$
e. $\$205.36$

Accepted Answer

The answer of Sexton Inc. is considering Projects S and...

Question 6

Under certain conditions, a project may have more than one IRR. One such condition is when, in addition to the initial investment at time = 0, a negative cash flow (or cost) occurs at the end of the project's life.

Accepted Answer

A) True 
 B)False

Question 7

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)  A project's regular IRR is found by compounding the initial cost at the WACC to find the terminal value (TV), then discounting the TV at the WACC. 
B)  A project's regular IRR is found by compounding the cash inflows at the WACC to find the present value (PV), then discounting the TV to find the IRR. 
C)  If a project's IRR is smaller than the WACC, then its NPV will be positive. 
D)  A project's IRR is the discount rate that causes the PV of the inflows to equal the project's cost. 
E)  If a project's IRR is positive, then its NPV must also be positive. 
A)  A project's regular IRR is found by compounding the initial cost at the WACC to find the terminal value (TV), then discounting the TV at the WACC. 
B)  A project's regular IRR is found by compounding the cash inflows at the WACC to find the present value (PV), then discounting the TV to find the IRR. 
C)  If a project's IRR is smaller than the WACC, then its NPV will be positive. 
D)  A project's IRR is the discount rate that causes the PV of the inflows to equal the project's cost. 
E)  If a project's IRR is positive, then its NPV must also be positive.

Question 8

Noe Drilling Inc. 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, i.e., what's the NPV of the chosen project versus the maximum possible NPV? Note that (1) "true value" is measured by NPV, and (2) under some conditions the choice of IRR vs. MIRR will have no effect on the value lost.

Accepted Answer

A)  $ \$ 185.90 $ 
B)  $ \$ 197.01 $ 
C)  $208.11 
D)  $ \$ 219.22 $ 
E)  $ \$ 230.32 $ 
A)  $ \$ 185.90 $ 
B)  $ \$ 197.01 $ 
C)  $208.11 
D)  $ \$ 219.22 $ 
E)  $ \$ 230.32 $

Question 9

The phenomenon called "multiple internal rates of return" arises when two or more mutually exclusive projects that have different lives are being compared.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following statements is CORRECT?

Accepted Answer

A)  The MIRR and NPV decision criteria can never conflict. 
B)  The IRR method can never be subject to the multiple IRR problem, while the MIRR method can be. 
C)  One reason some people prefer the MIRR to the regular IRR is that the MIRR is based on a generally more reasonable reinvestment rate assumption. 
D)  The higher the WACC, the shorter the discounted payback period. 
E)  The MIRR method assumes that cash flows are reinvested at the crossover rate. 
A)  The MIRR and NPV decision criteria can never conflict. 
B)  The IRR method can never be subject to the multiple IRR problem, while the MIRR method can be. 
C)  One reason some people prefer the MIRR to the regular IRR is that the MIRR is based on a generally more reasonable reinvestment rate assumption. 
D)  The higher the WACC, the shorter the discounted payback period. 
E)  The MIRR method assumes that cash flows are reinvested at the crossover rate.

Question 11

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. $\text {WACC:}$ $\quad $ $8.75 \%$  
$\begin{array}{c}
\begin{array}{lll}
 \text {Year}\
 \text {CF}_{S} \
 \text {CF}_{L} 
\end{array}
\begin{array}{c}
 0 \
\hline -\$1,100\
-\$2,200
\end{array}
\begin{array}{c}
1 \
\hline \$375\
725
\end{array}
\begin{array}{c}
2 \
\hline \$375\
\$725
\end{array}
\begin{array}{c}
3 \
\hline\$375 \
\$725
\end{array}
\begin{array}{c}
4 \
\hline\$375 \
\$725
\end{array}
\end{array}$

a. $\$ 32.12$
b. $\$ 35.33$
c. $\$ 38.87$
d. $\$ 40.15$
e. $\$ 42.16$

Accepted Answer

The answer of Nast Inc. is considering Projects S and...

Question 12

Cornell 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. WACC: $\quad 10.00 \%$

$\begin{array}{c}
\begin{array}{lll}
 \text {Year}\
\text {Cash flows}
\end{array}
\begin{array}{lll}
 0 \
\hline -\$1,050 
\end{array}
\begin{array}{lll}
1 \
\hline \$450
\end{array}
\begin{array}{lll}
2 \
\hline \$460
\end{array}
\begin{array}{lll}
3 \
\hline \$470
\end{array}
\end{array}$

a $\$ 92.37$
b. $\$ 96.99$
c. $\$ 101.84$
d. $\$ 106.93$
e. $\$ 112.28$

Accepted Answer

The answer of Cornell Enterprises is considering a project that...

Question 13

Projects C and D are mutually exclusive and have normal cash flows. Project C has a higher NPV if the WACC is less than 12%, whereas Project D has a higher NPV if the WACC exceeds 12%. Which of the following statements is CORRECT?

Accepted Answer

A)  Project D probably has a higher IRR. 
B)  Project D is probably larger in scale than Project C. 
C)  Project C probably has a faster payback. 
D)  Project C probably has a higher IRR. 
E)  The crossover rate between the two projects is below 12%. 
A)  Project D probably has a higher IRR. 
B)  Project D is probably larger in scale than Project C. 
C)  Project C probably has a faster payback. 
D)  Project C probably has a higher IRR. 
E)  The crossover rate between the two projects is below 12%.

Question 14

Which of the following statements is CORRECT?

Accepted Answer

A)  The internal rate of return method (IRR) is generally regarded by academics as being the best single method for evaluating capital budgeting projects. 
B)  The payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects. 
C)  The discounted payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects. 
D)  The net present value method (NPV) is generally regarded by academics as being the best single method for evaluating capital budgeting projects. 
E)  The modified internal rate of return method (MIRR) is generally regarded by academics as being the best single method for evaluating capital budgeting projects. 
A)  The internal rate of return method (IRR) is generally regarded by academics as being the best single method for evaluating capital budgeting projects. 
B)  The payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects. 
C)  The discounted payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects. 
D)  The net present value method (NPV) is generally regarded by academics as being the best single method for evaluating capital budgeting projects. 
E)  The modified internal rate of return method (MIRR) is generally regarded by academics as being the best single method for evaluating capital budgeting projects.

Question 15

The NPV method is based on the assumption that projects' cash flows are reinvested at the project's risk-adjusted cost of capital.

Accepted Answer

A) True 
 B)False

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 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. 
E)  Since cash flows under the IRR and MIRR are both discounted at the same rate (the WAC
C) , these two methods always rank mutually exclusive projects in the same order. 
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 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. 
E)  Since cash flows under the IRR and MIRR are both discounted at the same rate (the WAC
C) , these two methods always rank mutually exclusive projects in the same order.

Question 17

Susmel Inc. is considering a project that has the following cash flow data. What is the project's payback? $\begin{array}{c}
\begin{array}{lll}
 \text {Year}\
\text {Cash flows}
\end{array}
\begin{array}{lll}
 0 \
\hline -\$500
\end{array}
\begin{array}{lll}
1 \
\hline \$150
\end{array}
\begin{array}{lll}
2 \
\hline \$200
\end{array}
\begin{array}{lll}
3 \
\hline \$300
\end{array}
\end{array}$

a $2.03$ years
b. $2.25$ years
c. $2.50$ years
d. $2.75$ years
e. $3.03$ years

Accepted Answer

The answer of Susmel Inc. is considering a project that...

Question 18

Taggart Inc. is considering a project that has the following cash flow data. What is the project's payback? $\begin{array}{c}
\begin{array}{lll}
 \text {Year}\
\text {Cash flows}
\end{array}
\begin{array}{lll}
 0 \
\hline -\$1,150 
\end{array}
\begin{array}{lll}
1 \
\hline \$500
\end{array}
\begin{array}{lll}
2 \
\hline \$500
\end{array}
\begin{array}{lll}
3 \
\hline \$500
\end{array}
\end{array}$

a. $1.86$ years
b. $2.07$ years
c. $2.30$ years
d. 2.53 years
e. $2.78$ years

Accepted Answer

The answer of Taggart Inc. is considering a project that...

Question 19

Projects A and B are mutually exclusive and have normal cash flows. Project A has an IRR of 15% and 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?

Accepted Answer

A)  The crossover rate for the two projects must be less than 12%. 
B)  Assuming the timing pattern of the two projects' cash flows is the same, Project B probably has a higher cost (and larger scale). 
C)  Assuming the two projects have the same scale, Project B probably has a faster payback than Project A. 
D)  The crossover rate for the two projects must be 12%. 
E)  Since B has the higher IRR, then it must also have the higher NPV if the crossover rate is less than the WACC of 12%. 
A)  The crossover rate for the two projects must be less than 12%. 
B)  Assuming the timing pattern of the two projects' cash flows is the same, Project B probably has a higher cost (and larger scale). 
C)  Assuming the two projects have the same scale, Project B probably has a faster payback than Project A. 
D)  The crossover rate for the two projects must be 12%. 
E)  Since B has the higher IRR, then it must also have the higher NPV if the crossover rate is less than the WACC of 12%.

Question 20

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.

Accepted Answer

A) True 
 B)False

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.

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?

Under certain conditions, a project may have more than one IRR. One such condition is when, in addition to the initial investment at time = 0, a negative cash flow (or cost) occurs at the end of the project's life.

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.

The phenomenon called "multiple internal rates of return" arises when two or more mutually exclusive projects that have different lives are being compared.

Which of the following statements is CORRECT?

Projects C and D are mutually exclusive and have normal cash flows. Project C has a higher NPV if the WACC is less than 12%, whereas Project D has a higher NPV if the WACC exceeds 12%. Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

The NPV method is based on the assumption that projects' cash flows are reinvested at the project's risk-adjusted cost of capital.

Which of the following statements is CORRECT?

Susmel Inc. is considering a project that has the following cash flow data. What is the project's payback? Year Cash flows 0 - \5 00 1 \1 50 2 \2 00 3 \3 00 a $2.03$ years b. $2.25$ years c. $2.50$ years d. $2.75$ years e. $3.03$ years

Taggart Inc. is considering a project that has the following cash flow data. What is the project's payback? Year Cash flows 0 - \1 ,150 1 \5 00 2 \5 00 3 \5 00 a. $1.86$ years b. $2.07$ years c. $2.30$ years d. 2.53 years e. $2.78$ years

Projects A and B are mutually exclusive and have normal cash flows. Project A has an IRR of 15% and 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?

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.

An Overview of Financial Management

Financial Markets and Institutions

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

The Value of Money

Interest Rates

Bonds and Their Valuation

Risk and Rates of Return

Stocks and Their Valuation

The Cost of Capital

Cash Flow Estimation and Risk Analysis

Capital Structure and Leverage

Distributions to Shareholders: Dividends and Share Repurchases

Working Capital Management

Financial Planning and Forecasting

Multinational Financial Management

Financial and Operating Leverage: Analysis and Calculation

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Exam 11: The Basics of Capital Budgeting

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.

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?

Under certain conditions, a project may have more than one IRR. One such condition is when, in addition to the initial investment at time = 0, a negative cash flow (or cost) occurs at the end of the project's life.

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.

The phenomenon called "multiple internal rates of return" arises when two or more mutually exclusive projects that have different lives are being compared.

Which of the following statements is CORRECT?

Projects C and D are mutually exclusive and have normal cash flows. Project C has a higher NPV if the WACC is less than 12%, whereas Project D has a higher NPV if the WACC exceeds 12%. Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

The NPV method is based on the assumption that projects' cash flows are reinvested at the project's risk-adjusted cost of capital.

Which of the following statements is CORRECT?

Susmel Inc. is considering a project that has the following cash flow data. What is the project's payback? Year Cash flows 0 - \5 00 1 \1 50 2 \2 00 3 \3 00 a 2.032.032.03 years b. 2.252.252.25 years c. 2.502.502.50 years d. 2.752.752.75 years e. 3.033.033.03 years

Taggart Inc. is considering a project that has the following cash flow data. What is the project's payback? Year Cash flows 0 - \1 ,150 1 \5 00 2 \5 00 3 \5 00 a. 1.861.861.86 years b. 2.072.072.07 years c. 2.302.302.30 years d. 2.53 years e. 2.782.782.78 years

Projects A and B are mutually exclusive and have normal cash flows. Project A has an IRR of 15% and 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?

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.

An Overview of Financial Management

Financial Markets and Institutions

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

The Value of Money

Interest Rates

Bonds and Their Valuation

Risk and Rates of Return

Stocks and Their Valuation

The Cost of Capital

Cash Flow Estimation and Risk Analysis

Capital Structure and Leverage

Distributions to Shareholders: Dividends and Share Repurchases

Working Capital Management

Financial Planning and Forecasting

Multinational Financial Management

Financial and Operating Leverage: Analysis and Calculation

Filters

Susmel Inc. is considering a project that has the following cash flow data. What is the project's payback? Year Cash flows 0 - \5 00 1 \1 50 2 \2 00 3 \3 00 a $2.03$ years b. $2.25$ years c. $2.50$ years d. $2.75$ years e. $3.03$ years

Taggart Inc. is considering a project that has the following cash flow data. What is the project's payback? Year Cash flows 0 - \1 ,150 1 \5 00 2 \5 00 3 \5 00 a. $1.86$ years b. $2.07$ years c. $2.30$ years d. 2.53 years e. $2.78$ years