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

Question 1

Selecting the project that has the highest equivalent annual annuity seems to be the rule for comparing projects with different lives.This rule should apply to both independent and mutually exclusive projects.

Answer 1

False

Question 2

Under certain conditions,a project may have more than one IRR.One such condition is when,in addition to the initial investment at time = 0,a negative cash flow (or cost) occurs at the end of the project's life.

Answer 2

True

Question 3

When evaluating mutually exclusive projects,the 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.

Answer 3

False

Question 4

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

Question 5

A decision to undertake significant downsizing to control fixed costs is usually made by senior management,with the decision reported to the firm's board of directors.

Question 6

Small businesses make less use of DCF capital budgeting techniques than large businesses.This may reflect a lack of knowledge on the part of small firms' managers,but it may also reflect a rational conclusion that the costs of using DCF analysis outweigh the benefits of these methods for very small firms.

Question 7

The NPV method's assumption that cash inflows are reinvested at the cost of capital is more reasonable than the IRR's assumption that cash flows are reinvested at the IRR.This is an important reason that the NPV method is generally preferred over the IRR method.

Question 8

A decrease in the firm's discount rate (r,or WACC) will increase projects' NPVs,which could change the accept/reject decision for any potential project.However,such a change would have no impact on the project's IRR; therefore,the accept/reject decision under the IRR method is independent of the cost of capital.

Question 9

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.

Question 10

If a firm is experiencing no capital rationing,it should accept all investment proposals whose accounting rate of return is equal to or greater than the weighted average cost of capital.

Question 11

The MIRR method has wide appeal for professors,but most business executives prefer the NPV method to either the regular IRR or MIRR.

Question 12

Assuming that their NPVs based on the firm's cost of capital are equal,the NPV of a project whose cash flows accrue relatively rapidly will be more sensitive to changes in the discount rate than the NPV of a project whose cash flows come in later in its life.

Question 13

When considering two mutually exclusive projects,the firm should always select that project whose IRR is the highest provided the projects have the same initial cost.This statement is true regardless of whether the projects can be repeated or not.

Question 14

The NPV and IRR methods,when used to evaluate independent and equally risky projects,will lead to different accept/reject decisions if their IRRs are greater than the cost of capital.

Question 15

Financing pressure or liquidity can explain the popular use of payback period in project appraisals for small firms.

Question 16

The level of detail needed to determine capital budget expenditures related to compliance with safety and/or environmental issues varies depending on the size and scope of the project(s).

Question 17

In theory,any capital budgeting investment rule should depend solely on forecasted cash flows and the opportunity cost of capital.The rule itself should not be affected by managers' tastes,the choice of accounting method,or the profitability of other independent projects.

Question 18

A firm should never undertake an investment if accepting the project would lead to an increase in the firm's cost of capital.

Question 19

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

Question 20

Because "present value" refers to the value of cash flows that occur at different points in time,a series of present values should not be summed to determine the value of a capital budgeting project.

Question 21

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.

A)The higher the WACC used to calculate the NPV, the lower the calculated NPV will be.
B)If a project's NPV is greater than zero, then its IRR must be less than the WACC.
C)If a project's NPV is greater than zero, then its IRR must be less than zero.
D)The NPVs of relatively risky projects should be found using relatively low WACCs.

Question 22

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.

Question 23

Which of the following statements is correct?

A)The IRR is generally regarded by academics as being the best single method for evaluating capital budgeting projects.
B)The payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects.
C)The discounted payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects.
D)The NPV is generally regarded by academics as being the best single method for evaluating capital budgeting projects.

Question 24

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.

A)The lower the WACC used to calculate it, the lower the calculated NPV will be.
B)If a project's NPV is less than zero, then its IRR must be less than the WACC.
C)If a project's NPV is greater than zero, then its IRR must be less than zero.
D)The NPV of a relatively low risk project should be found using a relatively high WACC.

Question 25

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.

A)The longer a project's payback period, the more desirable the project is normally considered to be by this criterion.
B)One drawback of the payback criterion for evaluating projects is that this method does not properly account for the time value of money.
C)If a project's payback is positive, then the project should be rejected because it must have a negative NPV.
D)The regular payback ignores cash flows beyond the payback period, but the discounted payback method overcomes this problem.

Question 26

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.

A)If Project A has a higher IRR than Project B, then Project A must have the lower NPV.
B)If Project A has a higher IRR than Project B, then Project A must also have a higher NPV.
C)The IRR calculation implicitly assumes that all cash flows are reinvested at the WACC.
D)If a project has normal cash flows and its IRR exceeds its WACC, then the project's NPV must be positive.

Question 27

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.

A)A project's regular IRR is found by compounding the initial cost at the WACC to find the terminal value (TV), then discounting the TV at the WACC.
B)A project's regular IRR is found by compounding the cash inflows at the WACC to find the present value (PV), then discounting to find the IRR.
C)If a project's IRR is smaller than the WACC, then its NPV will be positive.
D)A project's IRR is the discount rate that causes the PV of the inflows to equal the project's cost.

Question 28

Which statement regarding payback is true?

A)The shorter a project's payback period, the less desirable the project is normally considered to be by this criterion.
B)One drawback of the payback criterion for evaluating projects is that this method does not take account of cash flows beyond the payback period.
C)If a project's payback is positive, then the project should be accepted because it must have a positive NPV.
D)The regular payback ignores cash flows beyond the payback period, but the discounted payback method overcomes this problem.

Question 29

Which statement regarding normal cash flows is correct?

A)Projects with normal cash flows can have only one real IRR.
B)Projects with normal cash flows can have two or more real IRRs.
C)The "multiple IRR problem" can arise if a project's cash flows are normal.
D)Projects with non-normal cash flows are almost never encountered in the real world.

Question 30

Which statement regarding normal cash flows is correct?

A)If a project has normal cash flows, then its IRR must be positive.
B)If a project has normal cash flows, then its MIRR must be positive.
C)If a project has normal cash flows, then it will have exactly two real IRRs.
D)If a project has normal cash flows, then it can have only one real IRR, whereas a project with non-normal cash flows might have more than one real IRR.

Question 31

Which statement about an NPV profile graph is true?

A)An NPV profile graph shows how a project's payback varies as the cost of capital changes.
B)The NPV profile graph for a normal project will generally have a positive (upward) slope as the life of the project increases.
C)An NPV profile graph is designed to give decision makers an idea about how a project's risk varies with its life.
D)An NPV profile graph is designed to give decision makers an idea about how a project's contribution to the firm's value varies with the cost of capital.

Question 32

Which statement regarding the IRR method is correct?

A)One defect of the IRR method is that it does not take account of cash flows over a project's full life.
B)One defect of the IRR method is that it does not take account of the time value of money.
C)One defect of the IRR method is that it does not take account of the cost of capital.
D)One defect of the IRR method is that it does not assume that the cash flows to be received from a project can be reinvested at a rate other than the IRR itself.

Question 33

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.

Question 34

Theoretically speaking,hard capital rationing does not exist.

Question 35

Which statement regarding payback is true?

A)The regular payback method recognizes all cash flows over a project's life.
B)The discounted payback method recognizes all cash flows over a project's life, and it also adjusts these cash flows to account for the time value of money.
C)The regular payback method was widely used years ago, but virtually no companies even calculate the payback today.
D)The regular payback is useful as an indicator of a project's liquidity because it gives managers an idea of how long it will take to recover the funds invested in a project.

Question 36

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

Question 37

Which of the following statements is correct?

A)The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the IRR.
B)The NPV method assumes that cash flows will be reinvested at the risk-free rate, while the IRR method assumes reinvestment at the IRR.
C)The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the risk-free rate.
D)The NPV method does not consider all relevant cash flows, particularly cash flows beyond the payback period.

Question 38

Which statement about the NPV is true?

A)The NPV method was once the favourite of academics and business executives, but today most authorities regard the MIRR as being the best indicator of a project's profitability.
B)The NPV method is regarded by most academics as being the best indicator of a project's profitability; hence, most academics recommend that firms use only this one method.
C)A project's NPV depends on the total amount of cash flows the project produces, but because the cash flows are discounted at the WACC, it does not matter if the cash flows occur early or late in the project's life.
D)The NPV and IRR methods may give different recommendations regarding which of two mutually exclusive projects should be accepted, but they always give the same recommendation regarding the acceptability of a normal, independent project.

Question 39

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.

A)A project's regular IRR is found by discounting the cash inflows at the WACC to find the present value (PV), then compounding this PV to find the IRR.
B)If a project's IRR is greater than the WACC, then its NPV must be negative.
C)To find a project's IRR, we must solve for the discount rate that causes the PV of the inflows to equal the PV of the project's costs.
D)To find a project's IRR, we must find a discount rate that is equal to the WACC.

Question 40

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

A)The project's IRR increases as the WACC declines.
B)The project's NPV increases as the WACC declines.
C)The project's MIRR is unaffected by changes in the WACC.
D)The project's regular payback increases as the WACC declines.

Question 41

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

A)If the two projects' NPV profiles do not cross in the upper right quadrant, then there will be a sharp conflict as to which one should be selected.
B)If the cost of capital is greater than the crossover rate, then the IRR and the NPV criteria will not result in a conflict between the projects. One project will rank higher by both criteria.
C)For a conflict to exist between NPV and IRR, the initial investment cost of one project must exceed the cost of the other.
D)For a conflict to exist between NPV and IRR, one project must have an increasing stream of cash flows over time while the other has a decreasing stream. If both sets of cash flows are increasing or decreasing, then it would be impossible for a conflict to exist, even if one project is larger than the other.

Question 42

Which of the following statements is correct?

A)The IRR method appeals to some managers because it gives an estimate of the rate of return on projects rather than a dollar amount, which the NPV method provides.
B)The discounted payback method eliminates all of the problems associated with the payback method.
C)When evaluating independent projects, the NPV and IRR methods often yield conflicting results regarding a project's acceptability.
D)To find the MIRR, we discount the TV at the IRR.

Question 43

A company is choosing between two projects.The larger project has an initial cost of $100,000,annual cash flows of $30,000 for 5 years,and an IRR of 15.24%.The smaller project has an initial cost of $50,000,annual cash flows of $16,000 for 5 years,and an IRR of 16.63%.The projects are equally risky.Which of the following statements is correct?

A)Since the smaller project has the higher IRR, the two projects' NPV profiles cannot cross, and the smaller project's NPV will be higher at all positive values of WACC.
B)Since the smaller project has the higher IRR, the two projects' NPV profiles will cross, and the larger project will look better based on the NPV at all positive values of WACC.
C)Since the smaller project has the higher IRR but the larger project has the higher NPV at a zero discount rate, the two projects' NPV profiles will cross, and the larger project will have the higher NPV if the WACC is less than the crossover rate.
D)Since the smaller project has the higher IRR and the larger NPV at a zero discount rate, the two projects' NPV profiles will cross, and the larger smaller project will look better if the WACC is less than the crossover rate.

Question 44

Which of the following statements is correct?

A)If a project with normal cash flows has an IRR greater than the WACC, the project must have a positive NPV.
B)If Project A's IRR exceeds Project B's, then A must have the higher NPV.
C)A project's MIRR can never exceed its IRR.
D)If a project with normal cash flows has an IRR less than the WACC, the project must have a positive NPV.

Question 45

Which of the following statements is correct?

A)For a project with normal cash flows, any change in the WACC will change both the NPV and the IRR.
B)To find the MIRR, we first compound cash flows at the regular IRR to find the TV, and then we discount the TV at the WACC to find the PV.
C)The NPV and IRR methods both assume cash flows can be reinvested at the WACC. However, the MIRR method assumes reinvestment at the MIRR itself.
D)If two projects have the same cost, and if their NPV profiles cross in the upper right quadrant, then the project with the lower IRR probably has more of its cash flows coming in the later years.

Question 46

Westchester Corp.is considering two equally risky,mutually exclusive projects,both of which have normal cash flows.Project A has an IRR of 11%,while Project B's IRR is 14%.When the WACC is 8%,the projects have the same NPV.Given this information,which of the following statements is correct?

A)If the WACC is 13%, Project A's NPV will be higher than Project B's.
B)If the WACC is 9%, Project A's NPV will be higher than Project B's.
C)If the WACC is 6%, Project B's NPV will be higher than Project A's.
D)If the WACC is 9%, Project B's NPV will be higher than Project A's.

Question 47

The regular payback method has a number of disadvantages,some of which are listed below.Which of these items is NOT a disadvantage of this method?

A)It lacks an objective, market-determined benchmark for making decisions.
B)It ignores cash flows beyond the payback period.
C)It does not directly account for the time value of money.
D)It does not provide any indication regarding a project's liquidity.

Question 48

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?

A)If the WACC is 10%, both projects will have positive NPVs.
B)If the WACC is 6%, Project S will have the higher NPV.
C)If the WACC is 13%, Project S will have the lower NPV.
D)If the WACC is 10%, both projects will have a negative NPV.

Question 49

expansion into existing products or markets

A)4,1
B)3,2
C)1,2
D)4,2

Question 50

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 WACC is 10%,Project Y has a higher NPV than X.Given this information,which of the following statements is correct?

A)The crossover rate between the two projects must be less than 10%.
B)The crossover rate between the two projects must be greater than 10%.
C)If the WACC is 8%, Project X will have the higher NPV.
D)If the WACC is 18%, Project Y will have the higher NPV.

Question 51

Which statement about multiple IRRs is true?

A)For a project to have more than one IRR, both IRRs must be greater than the WACC.
B)If two projects are mutually exclusive, then they are likely to have multiple IRRs.
C)If a project is independent, then it cannot have multiple IRRs.
D)Multiple IRRs can occur only if the signs of the cash flows change more than once.

Question 52

Projects C and D are mutually exclusive and have normal cash flows.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?

A)Project D has a higher IRR.
B)Project D is probably larger in scale than Project C.
C)Project C probably has a faster payback.
D)Project C has a higher IRR.

Question 53

Which of the following statements is correct?

A)For independent projects, the NPV, IRR, MIRR, and discounted payback (using a payback requirement of three years or less) methods always lead to the same accept/reject decisions for a given project.
B)For mutually exclusive projects with normal cash flows, the NPV and MIRR methods can never conflict, but their results could conflict with the discounted payback and the regular IRR methods.
C)Multiple IRRs can exist, but not multiple MIRRs. This is one reason some people favour the MIRR over the regular IRR.
D)If a firm uses the discounted payback method with a required payback of four years, then it will accept more projects than if it used as its cutoff criterion a regular payback of four years.

Question 54

Which of the following statements is correct?

A)The MIRR and NPV decision criteria can never conflict.
B)The IRR method can never be subject to the multiple IRR problem, while the MIRR method can be.
C)One reason some people prefer the MIRR to the regular IRR is that the MIRR is based on what is generally a more reasonable assumption about the reinvestment rate than the regular IRR.
D)The higher the WACC, the shorter the discounted payback period.

Question 55

Which of the following statements is correct?

A)One advantage of the NPV over the IRR is that NPV takes account of cash flows over a project's full life whereas IRR does not.
B)One advantage of the NPV over the IRR is that NPV assumes that cash flows will be reinvested at the WACC, whereas IRR assumes that cash flows are reinvested at the IRR. The NPV assumption is generally more likely to be appropriate.
C)One advantage of the NPV over the MIRR method is that NPV takes account of cash flows over a project's full life whereas MIRR does not.
D)One advantage of the NPV over the MIRR method is that NPV discounts cash flows whereas the MIRR is based on undiscounted cash flows.

Question 56

Projects S and L both have an initial cost of $10,000,followed by a series of positive cash inflows.Project S's undiscounted net cash flows total $20,000,while L's total undiscounted flows are $30,000.At a WACC of 10%,the two projects have identical NPVs.Which project's NPV is more sensitive to changes in the WACC?

A)Project S
B)Project L
C)Both projects are equally sensitive to changes in the WACC since their NPVs are equal at all costs of capital.
D)Neither project is sensitive to changes in the discount rate, since both have NPV profiles that are horizontal.

Question 57

Projects S and L both have normal cash flows,and the projects have the same risk; hence,both are evaluated with the same WACC,10%.However,S has a higher IRR than L.Which of the following statements is correct?

A)Project S must have a higher NPV than Project L.
B)If Project S has a positive NPV, then Project L must also have a positive NPV.
C)If the WACC falls, then each project's IRR will increase.
D)If Projects S and L have the same NPV at the current WACC, 10%, then Project L, the one with the lower IRR, would have a higher NPV if the WACC used to evaluate the projects declined.

Question 58

Projects A and B have identical expected lives and identical initial cash outflows (costs).However,most of one project's cash flows come in the early years,while most of the other project's cash flows occur in the later years.The two NPV profiles are given below:Which of the following statements is correct?

A)More of Project A's cash flows occur in the later years.
B)More of Project B's cash flows occur in the later years.
C)We must have information on the cost of capital in order to determine which project has the larger early cash flows.
D)The NPV profile graph is inconsistent with the statement made in the problem.

Question 59

McCall Manufacturing has a WACC of 10%.The firm is considering two normal,equally risky,mutually exclusive,but not repeatable projects.The two projects have the same investment costs,but Project A has an IRR of 15%,while Project B has an IRR of 20%.Which of the following statements is correct?

A)Each project must have a negative NPV.
B)Since the projects are mutually exclusive, the firm should always select Project B.
C)If the crossover rate is 8%, Project B will have the higher NPV.
D)If the crossover rate is 8%, Project A will have a higher NPV than Project B.

Question 60

Which statement about a project's IRR is correct? Assume that all projects being considered have normal cash flows and are equally risky.

A)If a project's IRR is equal to its WACC, then, under all reasonable conditions, the project's NPV must be negative.
B)If a project's IRR is equal to its WACC, then, under all reasonable conditions, the project's IRR must be negative.
C)If a project's IRR is equal to its WACC, then, under all reasonable conditions, the project's NPV must be zero.
D)There is no necessary relationship between a project's IRR, its WACC, and its NPV.

Question 61

Babcock Inc.is considering a project that has the following cash flow and WACC data.What is the project's NPV?

A)$54.62
B)$57.49
C)$60.52
D)$63.54

Question 62

ZumBahlen Inc.is considering the following mutually exclusive projects:​​​ ​At what cost of capital will the NPV of the two projects be the same? (That is,what is the "crossover" rate?)

A)16.15%
B)16.74%
C)17.33%
D)17.80%

Question 63

Adler Enterprises is considering a project that has the following cash flow and WACC data.What is the project's NPV?

A)$142.37
B)$149.49
C)$156.97
D)$164.82

Question 64

Steve Hawke is a football star who has been offered contracts by two different teams.The payments (in millions of dollars) under the two contracts are shown below:​​​ ​Steve plans to accept the contract that provides him with the highest NPV.At what discount rate would he be indifferent between the two contracts?

A)10.85%
B)11.35%
C)12.66%
D)13.98%

Question 65

Choi Computer Systems is considering a project that has the following cash flow data.What is the project's IRR?

A)13.89%
B)15.43%
C)17.15%
D)19.05%

Question 66

Which statement about a project's MIRR is correct? Assume that the project being considered has normal cash flows,with one outflow followed by a series of inflows.

A)A project's MIRR is always greater than its regular IRR.
B)A project's MIRR is always less than its regular IRR.
C)If a project's IRR is greater than its WACC, then the MIRR will be less than the IRR.
D)If a project's IRR is greater than its WACC, then the MIRR will be greater than the IRR.

Question 67

Thompson Stores is considering a project that has the following cash flow data.What is the project's IRR?​​​ ​​

A)11.16%
B)12.40%
C)13.78%
D)15.16%

Question 68

Van Auken Inc.is considering a project that has the following cash flows:The company's WACC is 10%.What are the project's payback,IRR,and NPV?

A)payback = 2.4, IRR = 10.00%, NPV = $600
B)payback = 2.4, IRR = 21.22%, NPV = $260
C)payback = 2.6, IRR = 21.22%, NPV = $300
D)payback = 2.6, IRR = 21.22%, NPV = $260

Question 69

Johnson Enterprises is considering a project that has the following cash flow and WACC data.What is the project's NPV?

A)$98.78
B)$103.98
C)$109.45
D)$114.93

Question 70

Levin Company is considering a project that has the following cash flow data.What is the project's IRR?

A)15.94%
B)17.71%
C)19.68%
D)21.86%

Question 71

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

A)1.62 years
B)1.80 years
C)2.00 years
D)2.20 years

Question 72

Humboldt Inc.is considering a project that has the following cash flow and WACC data.What is the project's NPV?

A)$135.94
B)$143.09
C)$150.62
D)$166.90

Question 73

You are on the staff of Camden Inc.The CFO believes project acceptance should be based on the NPV,but Steve Camden,the president,insists that no project can 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 5.27%,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?

A)You should recommend that the project be rejected because its NPV is negative and its IRR is less than the WACC.
B)You should recommend that the project be rejected because, although its NPV is positive, it has an IRR that is less than the WACC.
C)You should recommend that the project be accepted because (1) its NPV is positive and (2) although it has two IRRs, in this case it would be better to focus on the MIRR, which exceeds the WACC. You should explain this to the president and tell him that that the firm's value will increase if the project is accepted.
D)You should recommend that the project be rejected because (1) its NPV is positive and (2) it has two IRRs, one of which is less than the WACC, which indicates that the firm's value will decline if the project is accepted.

Question 74

Tucker Corp.is considering a project that has the following cash flow data.What is the project's IRR?

A)15.82%
B)16.65%
C)17.48%
D)18.36%

Question 75

Projects A and B are mutually exclusive and have normal cash flows.Project A has an IRR of 15% and Project B's IRR is 20%.The company's WACC is 12%,and at that rate Project A has the higher NPV.Which of the following statements is correct?

A)The crossover rate for the two projects must be less than 12%.
B)Assuming the timing pattern of the two projects' cash flows is the same, Project B probably has a higher cost (and larger scale).
C)Assuming the two projects have the same scale, Project B probably has a faster payback than Project A.
D)Since B has the higher IRR, then it must also have the higher NPV if the crossover rate is less than the WACC of 12%.

Question 76

Edmondson Electric Systems is considering a project that has the following cash flow and WACC data.What is the project's NPV?

A)$243.43
B)$255.60
C)$268.38
D)$281.80

Question 77

Rentz Recreation Inc.is considering a project that has the following cash flow data.What is the project's IRR?

A)14.04%
B)15.44%
C)16.99%
D)18.69%

Question 78

Rappaport Enterprises is considering a project that has the following cash flow and WACC data.What is the project's NPV?

A)$211.29
B)$234.77
C)$260.85
D)$289.84

Question 79

Which statement about a project's MIRR 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.

A)A project's MIRR is always greater than its regular IRR.
B)A project's MIRR is always less than its regular IRR.
C)To find a project's MIRR, we compound cash inflows at the regular IRR and then find the discount rate that causes the PV of the terminal value to equal the initial cost.
D)To find a project's MIRR, the textbook procedure compounds cash inflows at the WACC and then finds the discount rate that causes the PV of the terminal value to equal the initial cost.

Question 80

Barry Company is considering a project that has the following cash flow and WACC data.What is the project's NPV?

A)$253.81
B)$282.01
C)$310.21
D)$341.23