Question 1

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 cash inflows at the WACC to find the terminal value (TV), then discounting this TV at the WACC. 
B)  A project's regular IRR is found by discounting the cash inflows at the WACC to find the present value (PV), then compounding this PV to find the IRR. 
C)  If a project's IRR is greater than the WACC, then its NPV must be negative. 
D)  To find a project's IRR, we must solve for the discount rate that causes the PV of the inflows to equal the PV of the project's costs. 
E)  To find a project's IRR, we must find a discount rate that is equal to the WACC. 
A)  A project's regular IRR is found by compounding the cash inflows at the WACC to find the terminal value (TV), then discounting this TV at the WACC. 
B)  A project's regular IRR is found by discounting the cash inflows at the WACC to find the present value (PV), then compounding this PV to find the IRR. 
C)  If a project's IRR is greater than the WACC, then its NPV must be negative. 
D)  To find a project's IRR, we must solve for the discount rate that causes the PV of the inflows to equal the PV of the project's costs. 
E)  To find a project's IRR, we must find a discount rate that is equal to the WACC. D

Question 2

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 IRR can be less than the WACC (and even negative), in which case it will be rejected.

Accepted Answer

A)  13.13% 
B)  14.44% 
C)  15.89% 
D)  17.48% 
E)  19.22% 
A)  13.13% 
B)  14.44% 
C)  15.89% 
D)  17.48% 
E)  19.22% A

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

An increase in the firm's WACC will decrease projects' NPVs, which could change the accept/reject decision for any potential project. However, such a change would have no impact on projects' IRRs. Therefore, the accept/reject decision under the IRR method is independent of the cost of capital.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following statements is CORRECT?

Accepted Answer

A) 	Depreciation is included in the estimate of cash flows (Cash flow = Net income + Depreciation), hence depreciation is set forth on a separate line in the cash budget. 
B) 	If cash inflows from collections occur in equal daily amounts but most payments must be made on the 10th of each month, then a regular monthly cash budget will be misleading.	The problem can be corrected by using a daily cash budget. 
C) 	Sound working capital policy is designed to maximize the time between cash expenditures on materials and the collection of cash on sales. 
D) 	If a firm wants to generate more cash flow from operations in the next month or two, it could change its credit policy from 2/10 net
30 to net 60. 
E) 	If a firm sells on terms of net 90, and if its sales are highly seasonal, with 80% of its sales in September, then its DSO as it is typically calculated (with sales per day = Sales for past 12 months/365) would probably be lower in October than in August 
A) 	Depreciation is included in the estimate of cash flows (Cash flow = Net income + Depreciation), hence depreciation is set forth on a separate line in the cash budget. 
B) 	If cash inflows from collections occur in equal daily amounts but most payments must be made on the 10th of each month, then a regular monthly cash budget will be misleading.	The problem can be corrected by using a daily cash budget. 
C) 	Sound working capital policy is designed to maximize the time between cash expenditures on materials and the collection of cash on sales. 
D) 	If a firm wants to generate more cash flow from operations in the next month or two, it could change its credit policy from 2/10 net
30 to net 60. 
E) 	If a firm sells on terms of net 90, and if its sales are highly seasonal, with 80% of its sales in September, then its DSO as it is typically calculated (with sales per day = Sales for past 12 months/365) would probably be lower in October than in August

Question 6

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 expected NPV can be negative, in which case it will be rejected.

Accepted Answer

A)  $250.15 
B)  $277.94 
C)  $305.73 
D)  $336.31 
E)  $369.94 
A)  $250.15 
B)  $277.94 
C)  $305.73 
D)  $336.31 
E)  $369.94

Question 7

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 MIRR can be less than the WACC (and even negative), in which case it will be rejected.

Accepted Answer

A)  13.42% 
B)  14.91% 
C)  16.56% 
D)  18.22% 
E)  20.04% 
A)  13.42% 
B)  14.91% 
C)  16.56% 
D)  18.22% 
E)  20.04%

Question 8

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 project 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)  $134.79 
B)  $141.89 
C)  $149.36 
D)  $164.29 
E)  $205.36 
A)  $134.79 
B)  $141.89 
C)  $149.36 
D)  $164.29 
E)  $205.36

Question 9

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 10

Which of the following statements is CORRECT?

Accepted Answer

A)  A project's NPV is found by compounding the cash inflows at the IRR to find the terminal value (TV), then discounting the TV at the WACC. 
B)  The lower the WACC used to calculate a project's NPV, the lower the calculated NPV will be. 
C)  If a project's NPV is less than zero, then its IRR must be less than the WACC. 
D)  If a project's NPV is greater than zero, then its IRR must be less than zero. 
A)  A project's NPV is found by compounding the cash inflows at the IRR to find the terminal value (TV), then discounting the TV at the WACC. 
B)  The lower the WACC used to calculate a project's NPV, the lower the calculated NPV will be. 
C)  If a project's NPV is less than zero, then its IRR must be less than the WACC. 
D)  If a project's NPV is greater than zero, then its IRR must be less than zero.

Question 11

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?

Accepted Answer

A)  Since the smaller project has the higher IRR, the two projects' NPV profiles cannot cross, and the smaller project's NPV will be higher at all positive values of WACC. 
B)  Since the smaller project has the higher IRR, the two projects' NPV profiles will cross, and the larger project will look better based on the NPV at all positive values of WACC. 
C)  If the company uses the NPV method, it will tend to favor smaller, shorter-term projects over larger, longer-term projects, regardless of how high or low the WACC is. 
D)  Since the smaller project has the higher IRR but the larger project has the higher NPV at a zero discount rate, the two projects' NPV profiles will cross, and the larger project will have the higher NPV if the WACC is less than the crossover rate. 
E)  Since the smaller project has the higher IRR and the larger NPV at a zero discount rate, the two projects' NPV profiles will cross, and the smaller project will look better if the WACC is less than the crossover rate. 
A)  Since the smaller project has the higher IRR, the two projects' NPV profiles cannot cross, and the smaller project's NPV will be higher at all positive values of WACC. 
B)  Since the smaller project has the higher IRR, the two projects' NPV profiles will cross, and the larger project will look better based on the NPV at all positive values of WACC. 
C)  If the company uses the NPV method, it will tend to favor smaller, shorter-term projects over larger, longer-term projects, regardless of how high or low the WACC is. 
D)  Since the smaller project has the higher IRR but the larger project has the higher NPV at a zero discount rate, the two projects' NPV profiles will cross, and the larger project will have the higher NPV if the WACC is less than the crossover rate. 
E)  Since the smaller project has the higher IRR and the larger NPV at a zero discount rate, the two projects' NPV profiles will cross, and the smaller project will look better if the WACC is less than the crossover rate.

Question 12

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

Question 13

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

Accepted Answer

A)  9.70% 
B)  10.78% 
C)  11.98% 
D)  13.31% 
E)  14.64% 
A)  9.70% 
B)  10.78% 
C)  11.98% 
D)  13.31% 
E)  14.64%

Question 14

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.

Accepted Answer

A)  $32.12 
B)  $35.33 
C)  $38.87 
D)  $40.15 
E)  $42.16 
A)  $32.12 
B)  $35.33 
C)  $38.87 
D)  $40.15 
E)  $42.16

Question 15

Last month, Lloyd's Systems analyzed the project whose cash flows are shown below. However, before the decision to accept or reject the project took place, the Federal Reserve changed interest rates and therefore the firm's WACC. The Fed's action did not affect the forecasted cash flows. By how much did the change in the WACC affect the project's forecasted NPV? Note that a project's expected NPV can be negative, in which case it should be rejected.

Accepted Answer

A)  -$18.89 
B)  -$19.88 
C)  -$20.93 
D)  -$22.03 
E)  -$23.13 
A)  -$18.89 
B)  -$19.88 
C)  -$20.93 
D)  -$22.03 
E)  -$23.13

Question 16

The NPV and IRR methods, when used to evaluate two independent and equally risky projects, will lead to different accept/reject decisions and thus capital budgets if the projects' IRRs are greater than their cost of capital.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following statements is CORRECT?

Accepted Answer

A)  The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the IRR. 
B)  The NPV method assumes that cash flows will be reinvested at the risk-free rate, while the IRR method assumes reinvestment at the IRR. 
C)  The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the risk-free rate. 
D)  The NPV method does not consider all relevant cash flows, particularly cash flows beyond the payback period. 
E)  The IRR method does not consider all relevant cash flows, particularly cash flows beyond the payback period. 
A)  The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the IRR. 
B)  The NPV method assumes that cash flows will be reinvested at the risk-free rate, while the IRR method assumes reinvestment at the IRR. 
C)  The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the risk-free rate. 
D)  The NPV method does not consider all relevant cash flows, particularly cash flows beyond the payback period. 
E)  The IRR method does not consider all relevant cash flows, particularly cash flows beyond the payback period.

Question 18

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

Accepted Answer

A)  1.42 years 
B)  1.58 years 
C)  1.75 years 
D)  1.93 years 
E)  2.12 years 
A)  1.42 years 
B)  1.58 years 
C)  1.75 years 
D)  1.93 years 
E)  2.12 years

Question 19

Malholtra 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 MIRR can be less than the WACC (and even negative), in which case it will be rejected.

Accepted Answer

A)  14.08% 
B)  15.65% 
C)  17.21% 
D)  18.94% 
E)  20.83% 
A)  14.08% 
B)  15.65% 
C)  17.21% 
D)  18.94% 
E)  20.83%

Question 20

A project's IRR is independent of the firm's cost of capital. In other words, a project's IRR doesn't change with a change in the firm's cost of capital.

Accepted Answer

A) True 
 B)False

Exam 10: The Basics of Capital Budgeting

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.

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 IRR can be less than the WACC (and even negative), in which case it will be rejected.

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.

An increase in the firm's WACC will decrease projects' NPVs, which could change the accept/reject decision for any potential project. However, such a change would have no impact on projects' IRRs. Therefore, the accept/reject decision under the IRR method is independent of the cost of capital.

Which of the following statements is CORRECT?

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 expected NPV can be negative, in which case it will be rejected.

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 MIRR can be less than the WACC (and even negative), in which case it will be rejected.

Which of the following statements is CORRECT?

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.

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

The NPV and IRR methods, when used to evaluate two independent and equally risky projects, will lead to different accept/reject decisions and thus capital budgets if the projects' IRRs are greater than their cost of capital.

Which of the following statements is CORRECT?

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

Malholtra 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 MIRR can be less than the WACC (and even negative), in which case it will be rejected.

A project's IRR is independent of the firm's cost of capital. In other words, a project's IRR doesn't change with a change in the firm's cost of capital.

An Overview of Financial Management and the Financial Environment

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Bonds, Bond Valuation, and Interest Rates

Risks and Rates of Return

Stocks and Their Valuation

Financial Options and Applications in Corporate Finance

The Cost of Capital

Cash Flow Estimation and Risk Analysis

Financial Planning and Forecasting Financial Statements

Corporate Valuation, Value-Based Management, and Corporate Governance

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Working Capital Management

Multinational Financial Management

Lease Financing

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

Initial Public Offerings, Investment Banking, and Financial Restructuring

Mergers, Lbos, Divestitures, and Holding Companies

Bankruptcy, Reorganization, and Liquidation

Derivatives and Risk Management

Portfolio Theory, Asset Pricing Models, and Behavioral Finance

Real Options

Analysis of Capital Structure Theory

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Pension Plan Management

Financial Management in Not-For-Profit Businesses

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