Exam 10: The basics of capital budgeting: evaluating cash flows

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.

If the IRR of normal Project X is greater than the IRR of mutually exclusive (and also normal)Project Y, we can conclude that the firm should always select X rather than Y if X has NPV > 0.

The primary reason that the NPV method is conceptually superior to the IRR method for evaluating mutually exclusive investments is that multiple IRRs may exist, and when that happens, we don't know which IRR is relevant.

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 less than the projects' cost of capital.

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

Markman & Sons is considering Projects S and L.These projects are mutually exclusive, equally risky, and not repeatable and their cash flows are shown below.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, i.e., no conflict will exist.

Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one cash outflow at t = 0 followed by a series of positive cash flows.

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.

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.

Which of the following statements is CORRECT?

Patterson Co.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.

Dickson Co.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.

When evaluating mutually exclusive projects, the modified IRR (MIRR)always leads to the same capital budgeting decisions as the NPV method, regardless of the relative lives or sizes of the projects being evaluated.

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? Assume that all projects being considered have normal cash flows and are equally risky.

Westwood Painting Co.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?

Robbins Inc.is considering a project that has the following cash flow and WACC data.What is the project's NPV? Note that if a project's expected NPV is negative, it should be rejected.

Wiley's Wire Products 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.