Question 1

Tuttle Enterprises 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 projected NPV is negative,it should be rejected. $$\begin{array} { l c c c c c } 
\text { WACC: } & { 11.50 \% } & & & & \
\text { Year } & 0 & 1 & 2 & 3 & 4 \
\hline  \text { Cash flows } & - \$ 1,000 & \$ 350 & \$ 350 & \$ 350 & \$ 350
\end{array}$$

Accepted Answer

A)  084.03 
B)  064.70 
C)  059.49 
D)  082.54 
E)  074.36

Question 2

Which of the following statements is CORRECT?

Accepted Answer

A)  For a project to have more than one IRR,then 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. 
E)  If a project has two IRRs,then the smaller one is the one that is most relevant,and it should be accepted and relied upon.

Question 3

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.

Accepted Answer

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 its MIRR will be greater than the IRR. 
D)  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. 
E)  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 4

Which of the following statements is CORRECT?

Accepted Answer

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,years ago,widely used,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. 
E)  The regular payback does not consider cash flows beyond the payback year,but the discounted payback overcomes this defect.

Question 5

Which of the following statements is CORRECT?

Accepted Answer

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. 
E)  A project's NPV profile must intersect the X-axis at the project's WACC.

Question 6

Taggart Inc.is considering a project that has the following cash flow data.What is the project's payback? $$\begin{array} { l c c c c } 
\text { Year } & 0 & 1 & 2 & 3 \
\hline  \text { Cash flows } & - \$ 1,075 & \$ 500 & \$ 500 & \$ 500
\end{array}$$

Accepted Answer

A)  2.15 years 
B)  1.70 years 
C)  2.11 years 
D)  1.81 years 
E)  2.45 years

Question 7

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.

Accepted Answer

A)  A project's NPV is generally found by compounding the cash inflows at the WACC to find the terminal value (TV),then discounting the TV at the IRR to find its PV. 
B)  The higher the WACC used to calculate the NPV,the lower the calculated NPV will be. 
C)  If a project's NPV is greater than zero,then its IRR must be less than the WACC. 
D)  If a project's NPV is greater than zero,then its IRR must be less than zero. 
E)  The NPVs of relatively risky projects should be found using relatively low WACCs.

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

Masulis Inc.is considering a project that has the following cash flow and WACC data.What is the project's discounted payback? $$\begin{array} { l c c c c c } 
\text { WACC: } & { 10.00 \% } & & & \
\text { Year } & 0 & 1 & 2 & 3 & 4 \
\hline  \text { Cash flows } & - \$ 925 & \$ 525 & \$ 485 & \$ 445 & \$ 405
\end{array}$$

Accepted Answer

A)  2.40 years 
B)  2.14 years 
C)  2.25 years 
D)  1.95 years 
E)  1.86 years

Question 10

Tesar Chemicals 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 NPV.If the decision is made by choosing the project with the higher IRR rather than the one with the higher NPV,how much,if any,value will be forgone,i.e. ,what's the chosen NPV versus the maximum possible NPV? Note that (1)"true value" is measured by NPV,and (2)under some conditions the choice of IRR vs.NPV will have no effect on the value gained or lost. $\text { WACC: } \quad 7.75 \%$
$\begin{array}{rrrrrr}&0&1&2&3&4\
\hline \mathrm{CF}_{\mathrm{S}} & -\$ 1,100 & \$ 550 & \$ 600 & \$ 100 & \$ 100 \
\mathrm{CF}_{\mathrm{L}} & -\$ 2,700 & \$ 650 & \$ 725 & \$ 800 & \$ 1,400
\end{array}$

Accepted Answer

A)  $102.07 
B)  $118.25 
C)  $124.47 
D)  $95.84 
E)  $133.18

Question 11

Assume that the economy is in a mild recession,and as a result interest rates and money costs generally are relatively low.The WACC for two mutually exclusive projects that are being considered is 8%.Project S has an IRR of 20% while Project L's IRR is 15%.The projects have the same NPV at the 8% current WACC.However,you believe that the economy is about to recover,and money costs and thus your WACC will also increase.You also think that the projects will not be funded until the WACC 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?

Accepted Answer

A)  You should reject both projects because they will both have negative NPVs under the new conditions. 
B)  You should delay a decision until you have more information on the projects,even if this means that a competitor might come in and capture this market. 
C)  You should recommend Project L,because at the new WACC it will have the higher NPV. 
D)  You should recommend Project S,because at the new WACC it will have the higher NPV. 
E)  You should recommend Project L because it will have the higher IRR at the new WACC.

Question 12

Simkins Renovations Inc.is considering a project that has the following cash flow data.What is the project's IRR? Note that a project's projected IRR can be less than the WACC (and even negative),in which case it will be rejected. $\begin{array}{lccccc}
\text { Year } & 0 & 1 & 2 & 3 & 4 \
\hline \text { Cash flows } & -\$ 625 & \$ 300 & \$ 290 & \$ 280 & \$ 270
\end{array}$
?

Accepted Answer

A)  29.04% 
B)  32.63% 
C)  24.55% 
D)  30.83% 
E)  29.94%

Question 13

Kosovski Company is considering Projects S and L,whose cash flows are shown below.These projects are mutually exclusive,equally risky,and are not repeatable.If the decision is made by choosing the project with the higher IRR,how much value will be forgone? Note that under some conditions choosing projects on the basis of the IRR will cause $0.00 value to be lost. $\text { WACC: } \quad 6.25 \%$
$\begin{array}{llllll}&0&1&2&3&4\\hline
\mathrm{CF}_{\mathrm{S}} & -\$ 1,050 & \$ 675 & \$ 650 & & \
\mathrm{CF}_{\mathrm{L}} & -\$ 1,050 & \$ 360 & \$ 360 & \$ 360 & \$ 360
\end{array}$

Accepted Answer

A)  $29.26 
B)  $35.69 
C)  $34.82 
D)  $26.33 
E)  $31.31

Question 14

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.

Accepted Answer

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

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

Lasik Vision Inc.recently analyzed the project whose cash flows are shown below.However,before Lasik decided to accept or reject the project,the Federal Reserve took actions that changed interest rates and therefore the firm's WACC.The Fed's action did not affect the forecasted cash flows.By how much did the change in the WACC affect the project's forecasted NPV? Note that a project's projected NPV can be negative,in which case it should be rejected. $$\begin{array} { l c c c c } 
\text { Old WACC: } & 8.00 \% & { \text { New WACC: } 9.75 \% } \
\text { Year } & 0 & 1 & 2 & 3 \
\hline  \text { Cash flows } & - \$ 1,000 & \$ 410 & \$ 410 & \$ 410
\end{array}$$

Accepted Answer

A)  -$30.55 
B)  -$34.12 
C)  -$32.50 
D)  -$28.60 
E)  -$29.25

Question 17

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 costs of capital.

Accepted Answer

A) True 
 B)False

Question 18

Last month,Lloyd's Systems analyzed the project whose cash flows are shown below.However,before the decision to accept or reject the project,the Federal Reserve took actions that changed interest rates and therefore the firm's WACC.The Fed's action did not affect the forecasted cash flows.By how much did the change in the WACC affect the project's forecasted NPV? Note that a project's projected NPV can be negative,in which case it should be rejected. $$\begin{array} { l c c c c } 
\text { Old WACC: } & 10.00 \% &{ \text { New WACC: } 9.50 \% } \
\text { Year } & 0 & 1 & 2 & 3 \
\hline \text { Cash flows } & - \$ 1,000 & \$ 410 & \$ 410 & \$ 410
\end{array}$$

Accepted Answer

A)  0$9.04 
B)  0$11.12 
C)  0$10.22 
D)  0$10.85 
E)  0$10.13

Question 19

Which of the following statements is CORRECT?

Accepted Answer

A)  One defect of the IRR method versus the NPV is that the IRR does not take account of cash flows over a project's full life. 
B)  One defect of the IRR method versus the NPV is that the IRR does not take account of the time value of money. 
C)  One defect of the IRR method versus the NPV is that the IRR does not take account of the cost of capital. 
D)  One defect of the IRR method versus the NPV is that the IRR values a dollar received today the same as a dollar that will not be received until sometime in the future. 
E)  One defect of the IRR method versus the NPV is that the IRR does not take proper account of differences in the sizes of projects.

Question 20

Warnock 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 projected NPV can be negative,in which case it will be rejected. $$\begin{array} { l c c c c } 
\text { WACC: } & { 10.00 \% } \
\text { Year } & 0 & 1 & 2 & 3 \
\hline  \text { Cash flows } & - \$ 1,050 & \$ 500 & \$ 400 & \$ 300
\end{array}$$

Accepted Answer

A)  -$47.38 
B)  -$39.09 
C)  -$29.61 
D)  -$40.27 
E)  -$39.48

Exam 11: The Basics of Capital Budgeting

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 cash outflow at t = 0 followed by a series of positive cash flows.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Taggart Inc.is considering a project that has the following cash flow data.What is the project's payback? $\begin{array} { l c c c c } \text { Year } & 0 & 1 & 2 & 3 \\\hline \text { Cash flows } & - \$ 1,075 & \$ 500 & \$ 500 & \$ 500\end{array}$

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.

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

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.

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

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 costs of capital.

Which of the following statements is CORRECT?