Deck 9: Capital Budgeting Decision Models

Question 1

A capital budgeting decision is typically a go or no-go decision on a product, service, facility, or activity of the firm. That is, we either accept the business proposal or we reject it. The choice of accepting or rejecting a proposed project is the cornerstone of financial management at all levels of a business.

Answer 1

Name and describe three key observations that we can make about the capital budgeting decision.

1. Long-term impact: One key observation about capital budgeting decisions is that they have a long-term impact on the financial health and performance of a company. These decisions involve large investments in assets or projects that will generate returns over an extended period of time. As such, it is crucial for companies to carefully evaluate the potential risks and rewards of these investments before making a decision.

2. Risk assessment: Another key observation is the importance of conducting a thorough risk assessment before making a capital budgeting decision. This involves analyzing various factors such as market conditions, competition, technological changes, and regulatory environment to identify potential risks that could impact the success of the investment. By understanding and mitigating these risks, companies can make more informed decisions and improve the likelihood of achieving their financial goals.

3. Strategic alignment: Lastly, capital budgeting decisions should be aligned with the overall strategic goals and objectives of the company. It is essential for companies to consider how the proposed investment fits into their long-term growth strategy and whether it will contribute to achieving their financial targets. By ensuring that capital budgeting decisions are in line with the company's strategic direction, organizations can maximize the value of their investments and drive sustainable growth.

Question 2

We can separate short-term and long-term decisions into three dimensions. Which of the below is NOT one of these?

A) Degree of information gathering prior to the decision
B) Cost
C) Personality of CEO making the decisions
D) Length of impact

Answer 2

C

Question 3

Consider the following tem-year project. The initial after-tax outlay or after-tax cost is $1,000,000. The future after-tax cash inflows each year for years 1 through 10 are $200,000 per year. What is the payback period without discounting cash flows?

A) 10 years
B) 5 years
C) 2.5 years
D) 0.5 years

Answer 3

B

Question 4

Consider the following four-year project. The initial after-tax outlay or after-tax cost is $1,000,000. The future after-tax cash inflows for years 1, 2, 3 and 4 are: $400,000, $300,000, $200,000 and $200,000, respectively. What is the payback period without discounting cash flows?

A) 2.5 years
B) 3.0 years
C) 3.5 years
D) 4.0 years

Question 5

The ________ model is usually considered the best of the capital budgeting decision-making models.

A) Internal Rate of Return (IRR)
B) Net Present Value (NPV)
C) Profitability Index (PI)
D) Discounted Payback Period

Question 6

The ________ model determines at what point in time cash outflow is recovered by the corresponding future cash inflow.

A) NPV
B) Buyback
C) Net Present Value
D) Payback Period

Question 7

Which of the statements below is TRUE of the payback period method?

A) It ignores the cash flow after the initial outflow has been recovered.
B) It is biased against projects with early-term payouts.
C) It incorporates time-value-of-money principles.
D) It focuses on cash flows after the initial outflow has been recovered.

Question 8

Acme, Inc. is considering a four-year project that has initial outlay or cost of $100,000. The respective cash inflows for years 1, 2, 3 and 4 are: $50,000, $40,000, $30,000 and $20,000. Acme uses the discounted payback period method, and has a discount rate of 11.50%. Will Acme accept the project if its payback period is 37 months?

A) Yes, because it pays back in less than 37 months.
B) No, because it pays back in over 37 months.
C) No, because it pays back in over 38 months.
D) No, because it pays back in over 40 months.

Question 9

A capital budgeting decision will require sound estimates of the time and amount of appropriate cash flow for the proposal. Thus, the appropriate future cash flow is a necessary input into all capital budgeting decisions.

Question 10

Consider the following four-year project. The initial outlay or cost is $180,000. The respective cash inflows for years 1, 2, 3 and 4 are: $100,000, $80,000, $80,000 and $20,000. What is the discounted payback period if the discount rate is 11%?

A) About 1.667 years
B) About 2.000 years
C) About 2.135 years
D) About 2.427 years

Question 11

The capital budgeting model has a predetermined accept or reject criterion. We need to examine the validity of these criteria within each decision model.

Question 12

The initial outlay or cost is $1,000,000 for a four-year project. The respective future cash inflows for years 1, 2, 3 and 4 are: $500,000, $300,000, $300,000 and $300,000. What is the payback period without discounting cash flows?

A) About 2.50 years
B) About 2.67 years
C) About 3.67 years
D) About 4.50 years

Question 13

________ is at the heart of corporate finance, because it is concerned with making the best choices about project selection.

A) Capital budgeting
B) Capital structure
C) Payback period
D) Short-term budgeting

Question 14

The initial outlay or cost for a four-year project is $1,000,000. The respective cash inflows for years 1, 2, 3 and 4 are: $500,000, $300,000, $300,000 and $300,000. What is the discounted payback period if the discount rate is 10%?

A) About 2.67 years
B) About 3.35 years
C) About 3.67 years
D) About 4.50 years

Question 15

The ________ model answers one basic question: How soon will I recover my initial investment?

A) Payback Period
B) IRR
C) NPV
D) Profitability Index

Question 16

Because money is limited, companies must be careful to choose projects that are feasible and profitable.

Question 17

Capital budgeting decisions are typically long-term decisions.

Question 18

Name and describe three key observations that we can make about the capital budgeting decision.

Question 19

Which of the statements below is FALSE?

A) Firms rarely use the payback period for small-dollar decisions.
B) Many companies use the payback period for small-dollar decisions because the time spent gathering the accurate cash flow may be lowered substantially if it is necessary to estimate only through the first few years.
C) Many companies use the payback period for small-dollar decisions because the accuracy of future cash flows on these smaller projects may be quite difficult to estimate far into the future.
D) Many companies use the payback period for small-dollar decisions because it does prevent a serious error when the future cash flow is never sufficient to recover the initial cash outlay.

Question 20

Which of the statements below is FALSE?

A) In order to account for the time value of money with the Payback Period Model, the future cash flow needs to be restated in current dollars.
B) The Discounted Payback Period method is the time it takes to recover the initial investment in current dollars.
C) When we discount a future cash flow with our standard time-value-of-money concepts, we inherently assume that the entire cash flow was received at the end of the year.
D) The Payback Period method (with no discounting) is the dollar amount that it takes to recover the initial investment in current dollars.

Question 21

Acme, Inc. is considering a four-year project that has an initial outlay or cost of $100,000. The respective future cash inflows from its project for years 1, 2, 3 and 4 are: $50,000, $40,000, $30,000 and $20,000. Will it accept the project if its payback period is 31 months?

A) Yes, because it pays back in 25 months.
B) Yes, because it pays back in 28 months.
C) No, because it pays back in over 31 months.
D) No, because it pays back in over 35 months.

Question 22

Which of the statements below is FALSE?

A) To account for the time value of money with the Payback Period Model, the future cash flow needs to be restated in current dollars.
B) The Discounted Payback Period method is the time it takes to recover the initial investment in future dollars.
C) When we discount a future cash flow with our standard time-value-of-money concepts, we inherently assume that the entire cash flow was received at the end of the year.
D) The Discounted Payback Period method does not correct for the cash flow after the recovery of the initial outflow.

Question 23

Geronimo, Inc. is considering a project that has an initial after-tax outlay or after-tax cost of $220,000. The respective future cash inflows from its four-year project for years 1 through 4 are: $50,000, $60,000, $70,000 and $80,000. Geronimo uses the net present value method and has a discount rate of 11%. Will Geronimo accept the project?

A) Geronimo accepts the project because the NPV is greater than $10,000.00.
B) Geronimo rejects the project because the NPV is about -$22,375.73.
C) Geronimo rejects the project because the NPV is about -$12,375.60.
D) Geronimo rejects the project because the NPV is about -$2,375.60.

Question 24

Dice, Inc. is considering a five-year project that has an initial after-tax outlay or after-tax cost of $70,000. The future after-tax cash inflows from its project for years 1, 2, 3, 4 and 5 are all the same at $35,000. Dice uses the net present value method and has a discount rate of 10%. Will Dice accept the project?

A) Dice accepts the project because the NPV is about $69,455.
B) Dice accepts the project because the NPV is about $62,678.
C) Dice rejects the project because the NPV is about -$13,382.
D) Dice rejects the project because the NPV is less than -$33,021.

Question 25

Which of the statements below is FALSE?

A) The NPV decision criterion is true when all projects are independent and the company has a sufficient source of funds to accept all positive NPV projects.
B) Two projects are mutually exclusive if the accepting of one project has no bearing on the accepting or rejecting of the other project.
C) Projects are mutually exclusive if picking one project eliminates the ability to pick the other project.
D) If a company has constrained capital, then it can only take on a limited number of projects.

Question 26

Which of the following may be TRUE regarding mutually exclusive capital budgeting projects?

A) There is need for only one project, and both projects can fulfill that current need.
B) By using funds for one project, there are not enough funds available for the other project.
C) There is a scarce resource that both projects would need.
D) All of the above

Question 27

Lincoln Industries Inc. is considering a project that has an initial after-tax outlay or after-tax cost of $350,000. The respective future cash inflows from its five-year project for years 1 through 5 are $75,000 each year. Lincoln expects an additional cash flow of $50,000 in the fifth year. The firm uses the net present value method and has a discount rate of 10%. Will Lincoln accept the project?

A) Lincoln accepts the project because it has an NPV greater than $5,000.
B) Lincoln rejects the project because it has an NPV less than $0.
C) Lincoln accepts the project because it has an NPV greater than $18,000.
D) There is not enough information to make a decision.

Question 28

In the NPV Model, all cash flows are stated ________.

A) in future value dollars, and the total inflow is "netted" against the outflow to see if the net amount is positive or negative
B) in present value or current dollars, and the outflow is "netted" against the total inflow to see if the gross amount is positive or negative
C) in present value or current dollars, and the total inflow is "netted" against the initial outflow to see if the net amount is positive or negative
D) in future dollars, and the initial outflow is "netted" against the total inflow to see if the net amount is positive

Question 29

Acme, Inc. is considering a four-year project that has an initial outlay or cost of $80,000. The respective future cash inflows for years 1, 2, 3 and 4 are: $40,000, $40,000, $30,000 and $30,000. Acme uses the discounted payback period method and has a discount rate of 12%. Will Acme accept the project if its payback period is two and one-half years?

Question 30

Lennon, Inc. is considering a five-year project that has an initial after-tax outlay or after-tax cost of $80,000. The respective future cash inflows from its project for years 1, 2, 3, 4 and 5 are: $15,000, $25,000, $35,000, $45,000 and $55,000. Lennon uses the net present value method and has a discount rate of 9%. Will Lennon accept the project?

A) Lennon accepts the project because the NPV is $129,455.25.
B) Lennon accepts the project because the NPV is 79,455.25.
C) Lennon accepts the project because the NPV is $49,455.25.
D) Lennon accepts the project because the NPV is less than zero.

Question 31

Dweller, Inc. is considering a four-year project that has an initial after-tax outlay or after-tax cost of $80,000. The future cash inflows from its project are $40,000, $40,000, $30,000 and $30,000 for years 1, 2, 3 and 4, respectively. Dweller uses the net present value method and has a discount rate of 12%. Will Dweller accept the project?

A) Dweller accepts the project because the NPV is greater than $30,000.
B) Dweller rejects the project because the NPV is less than -$4,000.
C) Dweller rejects the project because the NPV is -$3,021.
D) Dweller accepts the project because the NPV is greater than $28,000.

Question 32

The Discounted Payback Period method is a modified payback period model that considers how long it takes to recover the initial investment in current dollars.

Question 33

The net present value of an investment is ________.

A) the present value of all benefits (cash inflows)
B) the present value of all benefits (cash inflows) minus the present value of all costs (cash outflows) of the project
C) the present value of all costs (cash outflows) of the project
D) the present value of all costs (cash outflow) minus the present value of all benefits (cash inflow) of the project

Question 34

Which of the statements below is FALSE?

A) We calculate the equivalent annual annuity by taking the NPV of the project and find the annuity stream that equates to the NPV, using the appropriate discount rate for the project and life of the project.
B) In dealing with mutually exclusive projects of unequal lives, we can compute the EAA for the NPV of the project over the life of the project.
C) One of the advantages of NPV over other decision models is that we can select the appropriate discount rate for each individual project and still compare the resulting NPVs across different projects.
D) By using the EAA approach for mutually exclusive projects, we overcome all potential problems.

Question 35

Projects are mutually exclusive if picking one project eliminates the ability to pick the other project. This mutually exclusive situation can arise for different reasons. Which of the statements below is NOT one of these reasons?

A) One project will always have a negative NPV.
B) There is a scarce resource that both projects would need.
C) There is need for only one project, and both projects can fulfill that current need.
D) By using funds for one project, there are not enough funds available for the other project.

Question 36

In regard to the NPV method, which of the statements below is TRUE?

A) In the NPV Model, if two projects are being compared, the one with the highest IRR is selected.
B) In the NPV Model, the present cash flows are discounted at the rate r, the cost of capital.
C) In the NPV Model, most future cash flows are stated in present value or current dollars and the inflow is "netted" against the outflow to see if the net amount is positive or negative.
D) In the NPV Model, the net present value of an investment is the present value of all benefits (cash inflow) minus the present value of all costs (cash outflow) of the project.

Question 37

Describe the shortcomings of the payback period model or method (without discounting).

Question 38

By switching to monthly cash flows, we cannot get a more accurate estimate of the discounted payback period.

Question 39

Which of the statements below is FALSE?

A) The net present value decision model is an economically sound model when comparing different projects across a wide variety of products, services, and activities under capital constraint.
B) The greater the NPV of a project, the greater the "bag of money" for doing the project, and more money is better. If a company is short of capital, it would choose those projects that provide the largest "bag of money."
C) Despite all of the advantages of using the NPV Model, it is inconsistent with the concept of the time-value-of-money.
D) By discounting all future cash flows to the present, adding up all inflows, and subtracting all outflows, we are determining the current value of the project.

Question 40

There are two ways to correct for projects with unequal lives when using the NPV approach. Which of the answers below is one of these ways?

A) One way is to find a common life, without the need to extend the projects to the least common multiple of their lives.
B) One way is to find the present value factors and then compare them.
C) One way is to compare the lengths of the projects and take the project with the shortest life.
D) One way is to find a common life by extending the projects to the least common multiple of their lives.

Question 41

For small-dollar decisions, a company usually establishes a short, arbitrary cutoff date for handling the initial screening of many small-dollar opportunities.

Question 42

The capital budgeting decision model that utilizes all the discounted cash flow of a project is the ________ model, which is one of the single most important models in finance.

A) net present value (NPV)
B) internal rate of return (IRR)
C) profitability index (PI)
D) discounted payback period

Question 43

Finding the equivalent annual annuity (EAA) is a good way to deal with projects with unequal lives and should only be used with mutually exclusive projects.

Question 44

Flynn, Inc. is considering a four-year project that has an initial outlay or cost of $80,000. The future cash inflows from its project are $40,000, $40,000, $30,000, and $30,000 for years 1, 2, 3 and 4, respectively. Flynn uses the internal rate of return method to evaluate projects. What is the approximate IRR for this project?

A) The IRR is less than 12%.
B) The IRR is between 12% and 20%.
C) The IRR is about 24.55%.
D) The IRR is about 28.89%.

Question 45

Morgan, Inc. is considering an eight-year project that has an initial after-tax outlay or after-tax cost of $180,000. The future after-tax cash inflows from its project for years 1 through 8 are the same at $35,000. Morgan uses the net present value method and has a discount rate of 12%. Will Morgan accept the project?

A) Morgan accepts the project because the NPV is over $10,000.
B) Morgan accepts the project because the NPV is about $6,141.
C) Morgan rejects the project because the NPV is about -$6,133.
D) Morgan rejects the project because the NPV is below -$7,000.

Question 46

Suzie, Inc. wants to analyze the NPV profile for a five-year project that is considered to be very risky. The project's initial outlay or cost is $80,000 and it has respective cash inflows for years 1, 2, 3, 4 and 5 of $15,000, $25,000, $35,000, $45,000 and $55,000. Suzie wants to know how the NPV will change for the following required rates of returns: 9%, 14%, 19%, 24%, and 29%. From the NPV profile, at about what rate will the NPV be equal to zero?

Question 47

Opie, Inc. is considering an eight-year project that has an initial after-tax outlay or after-tax cost of $180,000. The future after-tax cash inflows from its project for years 1 through 8 are the same at $38,000. Opie uses the net present value method and has a discount rate of 11.50%. Will Opie accept the project?

A) Opie accepts the project because the NPV is greater than$12,000.
B) Opie accepts the project because the NPV is about $11,114.
C) Opie rejects the project because the NPV is about -$11,114.
D) Opie rejects the project because the NPV is less than -$12,000.

Question 48

The IRR is the discount rate that produces a zero NPV or the specific discount rate at which the present value of the cost equals ________.

A) the future value of the present cash outflows
B) the present value of the future benefits or cash inflows
C) the present value of the cash outflow
D) the investment

Question 49

The assignment of a discount rate to each project is an integral part of the NPV process.

Question 50

To determine the current value of a project, discount all future cash flows to the present and add up all cash inflow and outflow.

Question 51

Hubbard, Inc. is considering Project A and Project B, which are two mutually exclusively projects with unequal lives. Project A is an eight-year project that has an initial outlay or cost of $18,000. Its future cash inflows for years 1 through 8 are the same at $3,800. Project B is a six-year project that has an initial outlay or cost of $16,000. Its future cash inflows for years 1 through 6 are the same at $3,600. Hubbard uses the equivalent annual annuity (EAA) method and has a discount rate of 11.50%. Which, if any, project will Hubbard accept?

Question 52

Which of the statements below is TRUE?

A) The hurdle rate is the cost of debt needed to fund a project.
B) If the IRR exceeds a project's hurdle rate, the project should be rejected.
C) If the IRR clears the hurdle rate, the project is rejected.
D) The hurdle rate should be set so that it reflects the proper risk level for the project.

Question 53

Geronimo, Inc. is considering a project that has an initial outlay or cost of $220,000. The respective future cash inflows from its four-year project for years 1 through 4 are: $50,000, $60,000, $70,000, and $80,000, respectively. Geronimo uses the internal rate of return method to evaluate projects. Will Geronimo accept the project if its hurdle rate is 10%?

A) Geronimo will not accept this project because its IRR is about 9.70%.
B) Geronimo will not accept this project because its IRR is about 8.70%.
C) Geronimo will not accept this project because its IRR is about 6.50%.
D) Geronimo will not accept this project because its IRR is about 4.60%.

Question 54

The most popular alternative to NPV for capital budgeting decisions is the ________ method.

A) internal rate of return (IRR)
B) payback period
C) discounted payback period
D) profitability index

Question 55

Trudeau, Inc. is considering Project A and Project B, which are two mutually exclusively projects with unequal lives. Project A is an eight-year project that has an initial outlay or cost of $140,000. Its future cash inflows for years 1 through 8 are the same at $36,500. Project B is a six-year project that has an initial outlay or cost of $160,000. Its future cash inflows for years 1 through 6 are the same at $48,000. Trudeau uses the equivalent annual annuity (EAA) method and has a discount rate of 13%. Which project(s), if any, will Trudeau accept?

A) Trudeau will take Project B because it has a positive NPV and its EAA is greater than that for Project A.
B) Trudeau rejects both projects because both have a negative NPV (and thus negative EAA).
C) Trudeau accepts both projects because both have a positive NPV (and thus positive EAA).
D) Trudeau accepts Project A because its EAA of about $7,975 is greater than Project B's EAA of about $6,440.

Question 56

To be considered acceptable, a project must have an NPV greater than 1.0

Question 57

Without a computer and special calculator, ________.

A) computing the payback period is much more difficult than computing the IRR
B) finding the IRR will typically be a very easy process
C) finding the IRR may be a very tedious process only if the NPV is negative
D) finding the IRR may be a very tedious process since it is an iterative process

Question 58

Fox, Inc. is considering a five-year project that has initial after-tax outlay or after-tax cost of $170,000. The future after-tax cash inflows from its project for years 1 through 5 are $45,000 for each year. Fox uses the net present value method and has a discount rate of 11.25%. Will Fox accept the project?

A) Fox accepts the project because the NPV is about $5,455.
B) Fox accepts the project because the NPV is about $165,275.
C) Fox rejects the project because the NPV is about -$4,725.
D) Fox rejects the project because the NPV is about -$154,725.

Question 59

Which of the statements below describes the IRR decision criterion?

A) The decision criterion is to accept a project if the IRR falls below the desired or required return rate.
B) The decision criterion is to reject a project if the IRR exceeds the desired or required return rate.
C) The decision criterion is to accept a project if the IRR exceeds the desired or required return rate.
D) The decision criterion is to accept a project if the NPV is positive.

Question 60

George, Inc. is considering Project A and Project B, which are two mutually exclusively projects with unequal lives. Project A is an eight-year project that has an initial outlay or cost of $180,000. Its future cash inflows for years 1 through 8 are $38,000.Project B is a six-year project that has an initial outlay or cost of $160,000. Its future cash inflows for years 1 through 6 are the same at $36,000. George uses the equivalent annual annuity (EAA) method and has a discount rate of 11.50%. Will George accept the project?

A) George accepts Project B because it has a more positive EAA.
B) George rejects both projects because both have a negative NPV (and thus negative EAA).
C) George accepts Project A because its EAA is about $2,396 and Project B's EAA is only about $1,097.
D) George accepts Project A because its NPV (and thus EAA) is positive and Project B's NPV (and thus EAA) is negative.

Question 61

The hurdle rate should be set so that it reflects the proper risk level for the project. If we have to choose between two projects with similar risk and therefore similar hurdle rates, we would select the project that ________.

A) has a higher internal rate of return
B) has a lower internal rate of return
C) has a hurdle rate that is consistent with the payback period method
D) has a hurdle rate that is consistent with the discounted payback period model

Question 62

Lincoln Industries Inc. is considering a project that has an initial after-tax outlay or after-tax cost of $350,000. The respective future cash inflows from its five-year project for years 1 through 5 are $75,000 each year. Lincoln expects an additional cash flow of $50,000 in the fifth year. The firm uses the net present value method and has a discount rate of 10%. Will Lincoln accept the project?

A) Lincoln accepts the project because it has an IRR greater than 10%.
B) Lincoln rejects the project because it has an IRR less than 10%.
C) Lincoln accepts the project because it has an IRR greater than 5%.
D) There is not enough information to answer this question.

Question 63

Carter, Inc. is considering a five-year project that has an initial outlay or cost of $22,000. The future cash inflows from its project for years 1, 2, 3, 4 and 5 are $15,000, $15,000, $15,000, $15,000 and -$41,000, respectively. Compute both IRRs. Given these IRRs, compute the two NPVs. If Carter's true cost of borrowing for this project is 10%, would Carter choose the project?

Question 64

One problem with the decision criterion of IRR is that if cash flow is not standard, there is a possibility of multiple IRRs for a single project.

Question 65

One of the underlying assumptions of the IRR model is that all cash inflow can be reinvested at the individual project's internal rate of return (IRR) over the remaining life of the project.

Question 66

Two projects intersect, in terms of NPV, at a discount rate labeled the ________.

A) crossover rate
B) internal rate of return
C) discount rate
D) yield to maturity

Question 67

Which of the statements below is TRUE?

A) A problem with IRR as a decision rule is that if the cash flow is not standard, there is a possibility of multiple IRRs for a single project.
B) When we talk about standard cash flow for a project, we assume an initial cash outflow at the beginning of the project and negative cash flows in the future.
C) When we apply IRR to standard cash flow, we have the potential for more than one IRR solution.
D) For every period that the cash flow has a change of sign (negative to positive or positive to negative), the NPV profile could cross the y-axis, generating a MIRR.

Question 68

Lennon, Inc. is considering a five-year project that has an initial outlay or cost of $80,000. The respective future cash inflows from its project for years 1, 2, 3, 4 and 5 are: $15,000, $25,000, $35,000, $45,000, and $55,000. Lennon uses the internal rate of return method to evaluate projects. What is Lennon's IRR?

A) The IRR is less than 22.50%.
B) The IRR is about 24.16%.
C) The IRR is about 26.16%.
D) The IRR is over 26.50%.

Question 69

Which of the statements below is FALSE?

A) Project A has a higher y-axis intercept for its NPV profile than mutually exclusive Project B. As long as the profile of Project A is above the profile of Project B, Project A will have a higher NPV value for that particular discount rate.
B) Project A and Project B are mutually exclusive. The two projects intersect in terms of NPV at a discount rate labeled the crossover rate.
C) Project A has a higher y-axis intercept for its NPV profile than mutually exclusive Project B. As we proceed past the crossover rate to the right on the x-axis, Project B's profile will be above Project A's profile.
D) Project A has a higher y-axis intercept for its NPV profile than mutually exclusive Project B. This means that Project A has a lower NPV than Project B when the discount rate is zero.

Question 70

Suppose you have an investment that costs $80,000 at the beginning of the project, and it generates $30,000 a year for four years in positive cash flows. The cost of capital is 12%. The IRR of the project is 18.45% and the NPV is about $11,120. The IRR model assumes that at the end of the first year you can invest the $30,000 at ________.

A) 18.45%
B) 12.00%
C) a rate less than the cost of capital
D) a rate greater than the IRR

Question 71

The IRR is an unpopular capital budgeting decision model because even with the advent of calculators and spreadsheets, the cumbersome calculation remains.

Question 72

Which of the following in NOT a potential problem suffered by the IRR method of capital budgeting?

A) Multiple IRRs
B) Disagreement with the NPV as to whether a project with ordinary cash flows is profitable or not.
C) Incorporates the IRR as the reinvestment rate for the future cash flows
D) Comparing mutually exclusive projects

Question 73

The Internal Rate of Return (IRR) Model suffers from three problems. Which of the below is NOT one of these problems?

A) Comparing mutually exclusive projects
B) Cumbersome computations not resolvable by the latest technology
C) Incorporates the IRR as the reinvestment rate for the future cash flows
D) Multiple IRRs

Question 74

Dice, Inc. is considering a very risky five-year project that has an initial outlay or cost of $70,000. The future cash inflows from its project for years 1, 2, 3, 4, and 5 are all the same at $35,000. Dice uses the internal rate of return method to evaluate projects. Will Dice accept the project if its hurdle rate is 41.00%?

A) Dice will probably reject this project because its IRR is about 39.74%, which is slightly below its hurdle rate.
B) Dice will probably accept this project because its IRR is about 41.04%, which is slightly above its hurdle rate.
C) Dice will accept this project because its IRR is about 41.50%.
D) Dice will accept this project because its IRR is over 45.50%.

Question 75

Corbett and Sullivan Enterprises (CSE) use the Modified Internal Rate of Return (MIRR) when evaluating projects. CSE's cost of capital is 9.5%. What is the MIRR of a project if the initial costs are $10,200,000 and the project lasts seven years, with each year producing the same after-tax cash inflows of $1,900,000?

A) About 7.95%
B) About 8.01%
C) About 8.24%
D) About 8.88%

Question 76

The IRR decision criterion is to accept a project if the IRR exceeds the desired or required return rate and to reject the project if the IRR is less than the desired or required rate of return.

Question 77

Find the Modified Internal Rate of Return (MIRR) for the following series of future cash flows, given a discount rate of 11%: Year 0: -$22,000; Year 1: $5,000; Year 2: $6,000; Year 3: $7,000; Year 4: $7,500; and, Year 5: $8,000.

A) About 12.13%
B) About 12.88%
C) About 13.04%
D) About 13.12%

Question 78

Robinson, Inc. is considering a five-year project that has an initial outlay or cost of $70,000. The cash inflows from its project for years 1, 2, 3, 4 and 5 are all the same at $14,000. The borrowing costs are 10%. What is the IRR? Should Robinson use the IRR method to evaluation this project? Explain.

Question 79

Wyatt and Zachary Enterprises (WZE) uses the Modified Internal Rate of Return (MIRR) when evaluating projects. WZE's cost of capital is 9.75%. What is the MIRR of a project if the initial cost is $1,200,000 and the project will last seven years, with each year producing cash inflows of $290,000? Should WZE accept this project according to the MIRR method? Explain.

Question 80

The crossover rate is the discount rate where both projects have the same ________.

A) IRR
B) PI
C) NPV
D) length to completion