Simkins Renovations Inc. 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. $\begin{array}{c} \begin{array}{lll} \text {Year}\\ \text {Cash flows} \end{array} \begin{array}{lll} 0 \\ \hline -\$850 \end{array} \begin{array}{lll} 1 \\ \hline \$300 \end{array} \begin{array}{lll} 2 \\ \hline \$290 \end{array} \begin{array}{lll} 3 \\ \hline \$280 \end{array} \begin{array}{lll} 4 \\ \hline \$270 \end{array} \end{array}$ a $13.13 \%$ b. $14.44 \%$ c. $15.89 \%$ d. $17.48 \%$ e. $19.22 \%$

The answer of Simkins Renovations Inc. is considering a project...

Warr Company 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 or negative, in both cases it will be rejected. $\begin{array}{c} \begin{array}{lll} \text {Year}\\ \text {Cash flows} \end{array} \begin{array}{lll} 0 \\ \hline -\$1,050 \end{array} \begin{array}{lll} 1 \\ \hline \$400 \end{array} \begin{array}{lll} 2 \\ \hline \$400 \end{array} \begin{array}{lll} 3 \\ \hline \$400 \end{array} \begin{array}{lll} 4 \\ \hline \$400 \end{array} \end{array}$ a. $14.05 \%$ b. $15.61 \%$ c. $17.34 \%$ d. $19.27 \%$ e. $21.20 \%$

The answer of Warr Company is considering a project that...

Barry Company 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: $\quad 12.00 \%$ $\begin{array}{c} \begin{array}{lll} \text {Year}\\ \text {Cash flows} \end{array} \begin{array}{lll} 0 \\ \hline -\$1,100 \end{array} \begin{array}{lll} 1 \\ \hline \$400 \end{array} \begin{array}{lll} 2 \\ \hline \$390 \end{array} \begin{array}{lll} 3 \\ \hline \$380 \end{array} \begin{array}{lll} 4 \\ \hline \$370 \end{array} \end{array}$ a. $\$ 250.15$ b. $\$ 277.94$ c. $\$ 305.73$ d. $\$ 336.31$ e. $\$ 369.94$

The answer of Barry Company is considering a project that...

Exam 11: The Basics of Capital Budgeting

Project X's IRR is 19% and Project Y's IRR is 17%. The projects have the same risk and the same lives, and each has constant cash flows during each year of their lives. If the WACC is 10%, Project Y has a higher NPV than X. Given this information, which of the following statements is CORRECT?

(Multiple Choice)

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Question 21

Suppose a firm relies exclusively on the payback method when making capital budgeting decisions, and it sets a 4-year payback regardless of economic conditions. Other things held constant, which of the following statements is most likely to be true?

(Multiple Choice)

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Question 22

Which of the following statements is CORRECT?

(Multiple Choice)

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Question 23

Which of the following statements is CORRECT?

(Multiple Choice)

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Question 24

A conflict will exist between the NPV and IRR methods, when used to evaluate two equally risky but mutually exclusive projects, if the projects' cost of capital is less than the rate at which the projects' NPV profiles cross.

(True/False)

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Question 25

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

(True/False)

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Question 26

A firm should never accept a project if its acceptance would lead to an increase in the firm's cost of capital (its WACC).

(True/False)

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Question 27

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 $51,600, annual cash flows of $16,000 for 5 years, and an IRR of 16.65%. The projects are equally risky. Which of the following statements is CORRECT?

(Multiple Choice)

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Question 28

Which of the following statements is CORRECT?

(Multiple Choice)

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Question 29

The NPV and IRR methods, when used to evaluate two equally risky but mutually exclusive projects, will lead to different accept/reject decisions and thus capital budgets if the cost of capital at which the projects' NPV profiles cross is greater than the crossover rate.

(True/False)

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Question 30

Assume a project has normal cash flows. All else equal, which of the following statements is CORRECT?

(Multiple Choice)

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Question 31

Simkins Renovations Inc. 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 Cash flows 0 - \8 50 1 \3 00 2 \2 90 3 \2 80 4 \2 70 a $13.13 \%$ b. $14.44 \%$ c. $15.89 \%$ d. $17.48 \%$ e. $19.22 \%$

(Short Answer)

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Question 32

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.

(True/False)

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Question 33

Westchester Corp. is considering two equally risky, mutually exclusive projects, both of which have normal cash flows. Project A has an IRR of 11%, while Project B's IRR is 14%. When the WACC is 8%, the projects have the same NPV. Given this information, which of the following statements is CORRECT?

(Multiple Choice)

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Question 34

The regular payback method is deficient in that it does not take account of cash flows beyond the payback period. The discounted payback method corrects this fault.

(True/False)

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Question 35

Which of the following statements is CORRECT?

(Multiple Choice)

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Question 36

In theory, capital budgeting decisions should depend solely on forecasted cash flows and the opportunity cost of capital. The decision criterion should not be affected by managers' tastes, choice of accounting method, or the profitability of other independent projects.

(True/False)

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Question 37

Warr Company 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 or negative, in both cases it will be rejected. Year Cash flows 0 - \1 ,050 1 \4 00 2 \4 00 3 \4 00 4 \4 00 a. $14.05 \%$ b. $15.61 \%$ c. $17.34 \%$ d. $19.27 \%$ e. $21.20 \%$

(Short Answer)

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Question 38

Because "present value" refers to the value of cash flows that occur at different points in time, a series of present values of cash flows should not be summed to determine the value of a capital budgeting project.

(True/False)

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Question 39

Barry Company 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: $\quad 12.00 \%$ Year Cash flows 0 - \1 ,100 1 \4 00 2 \3 90 3 \3 80 4 \3 70 a. $\$ 250.15$ b. $\$ 277.94$ c. $\$ 305.73$ d. $\$ 336.31$ e. $\$ 369.94$

(Short Answer)

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Question 40

Project X's IRR is 19% and Project Y's IRR is 17%. The projects have the same risk and the same lives, and each has constant cash flows during each year of their lives. If the WACC is 10%, Project Y has a higher NPV than X. Given this information, which of the following statements is CORRECT?

Suppose a firm relies exclusively on the payback method when making capital budgeting decisions, and it sets a 4-year payback regardless of economic conditions. Other things held constant, which of the following statements is most likely to be true?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

A conflict will exist between the NPV and IRR methods, when used to evaluate two equally risky but mutually exclusive projects, if the projects' cost of capital is less than the rate at which the projects' NPV profiles cross.

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

A firm should never accept a project if its acceptance would lead to an increase in the firm's cost of capital (its WACC).

Which of the following statements is CORRECT?

The NPV and IRR methods, when used to evaluate two equally risky but mutually exclusive projects, will lead to different accept/reject decisions and thus capital budgets if the cost of capital at which the projects' NPV profiles cross is greater than the crossover rate.

Assume a project has normal cash flows. All else equal, which of the following statements is CORRECT?

Westchester Corp. is considering two equally risky, mutually exclusive projects, both of which have normal cash flows. Project A has an IRR of 11%, while Project B's IRR is 14%. When the WACC is 8%, the projects have the same NPV. Given this information, which of the following statements is CORRECT?

The regular payback method is deficient in that it does not take account of cash flows beyond the payback period. The discounted payback method corrects this fault.

Which of the following statements is CORRECT?

In theory, capital budgeting decisions should depend solely on forecasted cash flows and the opportunity cost of capital. The decision criterion should not be affected by managers' tastes, choice of accounting method, or the profitability of other independent projects.

Because "present value" refers to the value of cash flows that occur at different points in time, a series of present values of cash flows should not be summed to determine the value of a capital budgeting project.

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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