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

No 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 exceeds the rate at which the projects' NPV profiles cross.

Consider projects S and L.Both have normal cash flows,and the projects have the same risk,hence both are evaluated with the same cost of capital,10%.However,S has a higher IRR than L.Which of the following statements is CORRECT?

Poder Inc.is considering a project that has the following cash flow data.What is the project's payback? Year 0 1 2 3 Cash flows −$750 $300 $325 $350

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.

A basic rule in capital budgeting is that if a project's NPV exceeds its IRR,then the project should be accepted.

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

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?

Craig's Car Wash Inc.is considering a project that has the following cash flow and cost of capital (r)data.What is the project's discounted payback? R = 10)00% Year 0 1 2 3 Cash flows −$900 $500 $500 $500

Conflicts between two mutually exclusive projects occasionally occur,where the NPV method ranks one project higher but the IRR method ranks the other one first.In theory,such conflicts should be resolved in favor of the project with the higher positive NPV.

Which of the following statements is CORRECT?

Consider two projects,X and Y.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 cost of capital is 10%,Project Y has a higher NPV than X.Given this information,which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Worthington Inc.is considering a project that has the following cash flow data.What is the project's payback? Year 0 1 2 3 Cash flows −$500 $150 $200 $300

The cost of capital for two mutually exclusive projects that are being considered is 12%.Project K has an IRR of 20% while Project R's IRR is 15%.The projects have the same NPV at the 12% current cost of capital.Interest rates are currently high.However,you believe that money costs and thus your cost of capital will soon decline.You also think that the projects will not be funded until the cost of capital has decreased,and their cash flows will not be affected by the change in economic conditions.Under these conditions,which of the following statements is CORRECT?

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

Which of the following statements is CORRECT? Assume that all projects being considered have normal cash flows and are equally risky.

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.

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.