Question 1

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)   The lower the WACC used to calculate a project's NPV, 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.
E)   A project's NPV is found by compounding the cash inflows at the IRR to find the terminal value (TV) , then discounting the TV at the WACC. B

Question 2

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.

Accepted Answer

A) True 
 B)False  False

Question 3

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.

Accepted Answer

A) True 
 B)False  False

Question 4

Which of the following statements is CORRECT?

Accepted Answer

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

Question 5

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.

Accepted Answer

A) True 
 B)False

Question 6

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 7

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.

Accepted Answer

A)   $5.47
B)   $6.02
C)   $6.62
D)   $7.29
E)   $7.82

Question 8

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

Question 9

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.

Accepted Answer

A) True 
 B)False

Question 10

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.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following statements is CORRECT?

Accepted Answer

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

Question 12

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.

Accepted Answer

A)   $54.62
B)   $57.49
C)   $60.52
D)   $63.54
E)   $66.72

Question 13

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.

Accepted Answer

A)   $250.15
B)   $277.94
C)   $305.73
D)   $336.31
E)   $369.94

Question 14

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.

Accepted Answer

A) True 
 B)False

Question 15

The IRR 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

Which of the following statements is CORRECT? Assume that all projects being considered have normal cash flows and are equally risky.

Accepted Answer

A)   If a project's IRR is equal to its WACC, then under all reasonable conditions, the project's IRR must be negative.
B)   If a project's IRR is equal to its WACC, then under all reasonable conditions the project's NPV must be zero.
C)   There is no necessary relationship between a project's IRR, its WACC, and its NPV.
D)   When evaluating mutually exclusive projects, those projects with relatively long lives will tend to have relatively high NPVs when the cost of capital is relatively high.
E)   If a project's IRR is equal to its WACC, then, under all reasonable conditions, the project's NPV must be negative.

Question 17

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.

Accepted Answer

A)   13.42%
B)   14.91%
C)   16.56%
D)   18.22%
E)   20.04%

Question 18

Which of the following statements is CORRECT?

Accepted Answer

A)   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.
B)   Multiple IRRs can exist, but not multiple MIRRs.This is one reason some people favor the MIRR over the regular IRR.
C)   If a firm uses the discounted payback method with a required payback of 4 years, then it will accept more projects than if it used a regular payback of 4 years.
D)   The percentage difference between the MIRR and the IRR is equal to the project's WACC.
E)   The NPV, IRR, MIRR, and discounted payback (using a payback requirement of 3 years or less) methods always lead to the same accept/reject decisions for independent projects.

Question 19

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.

Accepted Answer

A)   $105.89
B)   $111.47
C)   $117.33
D)   $123.51
E)   $130.01

Question 20

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.

Accepted Answer

A)   8.86%
B)   9.84%
C)   10.94%
D)   12.15%
E)   13.50%

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.

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.