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Which of the following statements is CORRECT?


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.

F) C) and D)
G) B) and C)

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Projects A and B have identical expected lives and identical initial cash outflows (costs) 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.
E) The crossover rate, i.e., the rate at which Projects A and B have the same NPV, is greater than either project's IRR.

F) C) and D)
G) A) and B)

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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.


A) $77.49
B) $81.56
C) $85.86
D) $90.15
E) $94.66

F) B) and D)
G) B) and C)

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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.


A) If the two projects' NPV profiles do not cross, 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) If the cost of capital is less 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.
D) For a conflict to exist between NPV and IRR, the initial investment cost of one project must exceed the cost of the other.
E) 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.

F) A) and D)
G) A) and C)

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Assume that the economy is enjoying a strong boom, and as a result interest rates and money costs generally are relatively high. The WACC for two mutually exclusive projects that are being considered is 12%. Project S has an IRR of 20% while Project L's IRR is 15%. The projects have the same NPV at the 12% current WACC. However, you believe that the economy will soon fall into a mild recession, and money costs and thus your WACC will soon decline. You also think that the projects will not be funded until the WACC has decreased, and their cash flows will not be affected by the change in economic conditions. Under these conditions, which of the following statements is CORRECT?


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 both a higher IRR and a higher NPV under the new conditions.

F) C) and D)
G) None of the above

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


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

F) B) and E)
G) A) and D)

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Hindelang Inc. is considering a project that has the following cash flow and WACC data. What is the project's MIRR? Note that a project's projected MIRR can be less than the WACC (and even negative) , in which case it will be rejected.


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

F) B) and E)
G) B) and C)

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One advantage of the payback method for evaluating potential investments is that it provides information about a project's liquidity and risk.

A) True
B) False

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Masulis Inc. is considering a project that has the following cash flow and WACC data. What is the project's discounted payback?


A) 1.61 years
B) 1.79 years
C) 1.99 years
D) 2.22 years
E) 2.44 years

F) A) and E)
G) B) and D)

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Which of the following statements is CORRECT?


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
C) If a project is independent, then it cannot have
D) Multiple IRRs can only occur 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.

F) B) and D)
G) A) and D)

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Malholtra Inc. is considering a project that has the following cash flow and WACC data. What is the project's MIRR? Note that a project's projected MIRR can be less than the WACC (and even negative) , in which case it will be rejected.


A) 14.08%
B) 15.65%
C) 17.21%
D) 18.94%
E) 20.83%

F) None of the above
G) B) and C)

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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 greater than the crossover rate.

A) True
B) False

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Conflicts between two mutually exclusive projects occasionally occur, where the NPV method ranks one project higher but the IRR method puts the other one first. In theory, such conflicts should be resolved in favor of the project with the higher NPV.

A) True
B) False

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

A) True
B) False

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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.


A) -$59.03
B) -$56.08
C) -$53.27
D) -$50.61
E) -$48.08

F) C) and E)
G) A) and C)

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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 $51,600, annual cash flows of $16,000 for 5 years, and an IRR of 16.65%. 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) If the company uses the NPV method, it will tend to favor smaller, shorter-term projects over larger, longer-term projects, regardless of how high or low the WACC is.
D) 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.
E) 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 smaller project will look better if the WACC is less than the crossover rate.

F) A) and E)
G) A) and D)

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Ehrmann Data Systems is considering a project that has the following cash flow and WACC data. What is the project's MIRR? Note that a project's projected MIRR can be less than the WACC (and even negative) , in which case it will be rejected.


A) 9.32%
B) 10.35%
C) 11.50%
D) 12.78%
E) 14.20%

F) All of the above
G) A) and E)

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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 probably 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 probably has a higher IRR.
E) The crossover rate between the two projects is below 12%.

F) B) and E)
G) D) and E)

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Which of the following statements is CORRECT?


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.
E) We cannot draw a project's NPV profile unless we know the appropriate WACC for use in evaluating the project's NPV.

F) B) and D)
G) B) and C)

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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 the TV 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.
E) If a project's IRR is positive, then its NPV must also be positive.

F) C) and E)
G) None of the above

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