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

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 cost of capital is 7%.Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

The IRR 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?

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.

Garner 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 −$350 $200 $200 $200

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

The cost of capital for two mutually exclusive projects that are being considered is 8%.Project K has an IRR of 20% while Project R's IRR is 15%.The projects have the same NPV at the 8% current cost of capital.However,you believe that money costs and thus your cost of capital will also increase.You also think that the projects will not be funded until the cost of capital has increased,and their cash flows will not be affected by the change in economic conditions.Under these conditions,which of the following statements is CORRECT?

Which of the following statements is CORRECT?

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.

You are on the staff of O'Hara Inc.The CFO believes project acceptance should be based on the NPV,but Andrew O'Hara,the president,insists that no project should be accepted unless its IRR exceeds the project's risk-adjusted cost of capital.Now you must make a recommendation on a project that has a cost of $15,000 and two cash flows: $110,000 at the end of Year 1 and −$100,000 at the end of Year 2.The president and the CFO both agree that the appropriate cost of capital for this project is 10%.At 10%,the NPV is $2,355.37,but you find two IRRs,one at 6.33% and one at 527%,and a MIRR of 11.32%.Which of the following statements best describes your optimal recommendation,i.e. ,the analysis and recommendation that is best for the company and least likely to get you in trouble with either the CFO or the president?

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 cost of capital is 12%,and at that rate Project A has the higher NPV.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.

Shannon Co.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 4 Cash flows −$950 $525 $485 $445 $405

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.

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

If you were evaluating two mutually exclusive projects for a firm with a zero cost of capital,the payback method and NPV method would always lead to the same decision on which project to undertake.

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.

Both the regular and the modified IRR (MIRR)methods have wide appeal to professors,but most business executives prefer the NPV method to either of the IRR methods.