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

Yoga Center Inc.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.

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

Which of the following statements is CORRECT?

The internal rate of return is that discount rate that equates the present value of the cash outflows (or costs)with the present value of the cash inflows.

Which of the following statements is NOT a disadvantage of the regular payback method?

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.

Murray Inc.is considering Projects S and L, whose cash flows are shown below.These projects are mutually exclusive, equally risky, and not repeatable.The CEO wants to use the IRR criterion, while the CFO favors the NPV method.You were hired to advise Murray on the best procedure.If the wrong decision criterion is used, how much potential value would Murray lose?

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 WACC is 7%.Which of the following statements is CORRECT?

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 WACC.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 WACC 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?

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.

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

You are considering two mutually exclusive, equally risky, projects.Both have IRRs that exceed the WACC.Which of the following statements is CORRECT? Assume that the projects have normal cash flows, with one outflow followed by a series of inflows.

Other things held constant, an increase in the cost of capital will result in a decrease in a project's IRR.

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 IRR.

Langton Inc.is considering Projects S and L, whose cash flows are shown below.These projects are mutually exclusive, equally risky, and not repeatable.The CEO believes the IRR is the best selection criterion, while the CFO advocates the MIRR.If the decision is made by choosing the project with the higher IRR rather than the one with the higher MIRR, how much, if any, value will be forgone.In other words, what's the NPV of the chosen project versus the maximum possible NPV? Note that (1)"true value" is measured by NPV, and (2)under some conditions the choice of IRR vs.MIRR will have no effect on the value lost.

Watts 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.

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

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.

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

Which of the following statements is CORRECT?