Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

Suzanne's Cleaners is considering a project that has the following cash flow data.What is the project's payback?   Year 012345 Cash flows −$1,100$300$310$320$330$340\begin{array} { l c c c c c c } 	ext { Year } & 0 & 1 & 2 & 3 & 4 & 5 \\hline  	ext { Cash flows } & - \$ 1,100 & \$ 300 & \$ 310 & \$ 320 & \$ 330 & \$ 340\end{array} Year  Cash flows ​0−$1,100​1$300​2$310​3$320​4$330​5$340​​

Accepted Answer

A)   2.31 years
B)   2.56 years
C)   2.85 years
D)   3.16 years
E)   3.52 years F) A) and B)
G) C) and D)

Question 3

Which of the following statements is CORRECT?

Accepted Answer

A)   The discounted payback method eliminates all of the problems associated with the payback method.
B)   When evaluating independent projects, the NPV and IRR methods often yield conflicting results regarding a project's acceptability.
C)   To find the MIRR, we discount the TV at the IRR.
D)   A project's NPV profile must intersect the X-axis at the project's cost of capital.
E)   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.F) None of the above
G) B) and E)

Question 4

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 5

For a project with one initial cash outflow followed by a series of positive cash inflows, the modified IRR (MIRR) method involves compounding the cash inflows out to the end of the project's life, summing those compounded cash flows to form a terminal value (TV), and then finding the discount rate that causes the PV of the TV to equal the project's cost.

Accepted Answer

A) True 
 B)False

Question 6

Robbins Inc.is considering a project that has the following cash flow and cost of capital (r)  data.What is the project's NPV? Note that if a project's expected NPV is negative, it should be rejected.   r: 10.25% Year 012345 Cash flows −$1,000$300$300$300$300$300\begin{array} { l c c c c c c } 	ext { r: } & 10.25 \% & & & & \	ext { Year } & 0 & 1 & 2 & 3 & 4 & 5 \\hline  	ext { Cash flows } & - \$ 1,000 & \$ 300 & \$ 300 & \$ 300 & \$ 300 & \$ 300\end{array} r:  Year  Cash flows ​10.25%0−$1,000​1$300​2$300​3$300​4$300​5$300​​

Accepted Answer

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

Question 7

Current Design Co.is considering two mutually exclusive, equally risky, and not repeatable projects, S and L.Their cash flows are shown below.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.   r: 7.50% Y ear 01234CFS−$1,100$550$600$100$100CFL−$2,700$650$725$800$1,400\begin{array}{l}	ext { r: } 7.50 \%\\begin{array} { c c c c c c } 	ext { Y ear } & 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}\end{array} r: 7.50% Y ear CFS​CFL​​0−$1,100−$2,700​1$550$650​2$600$725​3$100$800​4$100$1,400​​​

Accepted Answer

A)   $138.10
B)   $149.21
C)   $160.31
D)   $171.42
E)   $182.52 F) B) and D)
G) C) and D)

Question 8

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 cost of capital.
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.F) D) and E)
G) C) and D)

Question 9

Both the regular and the modified IRR (MIRR) methods have wide appeal to professors, but most business executives prefer the NPV method to either of the IRR methods.

Accepted Answer

A) True 
 B)False

Question 10

Projects S and L are both normal projects with 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 cost of capital of 10%, the two projects have identical NPVs.Which project's NPV is more sensitive to changes in the cost of capital?

Accepted Answer

A)   Project L.
B)   Both projects are equally sensitive to changes in the cost of capital since their NPVs are equal at all costs of capital.
C)   Neither project is sensitive to changes in the discount rate, since both have NPV profiles that are horizontal.
D)   The solution cannot be determined because the problem gives us no information that can be used to determine the projects' relative IRRs.
E)   Project S.F) None of the above
G) A) and D)

Question 11

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 higher the cost of capital 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 cost of capital.
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 costs of capital.
E)   A project's NPV is generally found by compounding the cash inflows at the cost of capital to find the terminal value (TV) , then discounting the TV at the IRR to find its PV.F) B) and C)
G) C) and D)

Question 12

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

Accepted Answer

A)   A project's NPV increases as the cost of capital declines.
B)   A project's MIRR is unaffected by changes in the cost of capital.
C)   A project's regular payback increases as the cost of capital declines.
D)   A project's discounted payback increases as the cost of capital declines.
E)   A project's IRR increases as the cost of capital declines.F) B) and E)
G) A) and C)

Question 13

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 14

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 the time value of money.
B)   One defect of the IRR method versus the NPV is that the IRR does not take account of the cost of capital.
C)   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.
D)   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.
E)   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.F) B) and C)
G) A) and E)

Question 15

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

Question 16

McGlothin Inc.is considering a project that has the following cash flow data.What is the project's payback?   Year 0123 Cash flows −$1,150$500$500$500\begin{array} { l c c c c } 	ext { Year } & 0 & 1 & 2 & 3 \\hline  	ext { Cash flows } & - \$ 1,150 & \$ 500 & \$ 500 & \$ 500\end{array} Year  Cash flows ​0−$1,150​1$500​2$500​3$500​​

Accepted Answer

A)   1.86 years
B)   2.07 years
C)   2.30 years
D)   2.53 years
E)   2.78 years F) D) and E)
G) B) and E)

Question 17

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 18

Shannon Co.is considering a project that has the following cash flow and cost of capital (r)  data.What is the project's discounted payback?  r=10.00% Year 01234 Cash flows −$950$525$485$445$405\begin{array} { l c c c c c } & r = 10.00 \% \	ext { Year } & 0 & 1 & 2 & 3 & 4 \\hline  	ext { Cash flows } & - \$ 950 & \$ 525 & \$ 485 & \$ 445 & \$ 405\end{array} Year  Cash flows ​r=10.00%0−$950​1$525​2$485​3$445​4$405​​

Accepted Answer

A)   1.61 years
B)   1.79 years
C)   1.99 years
D)   2.22 years
E)   2.44 years F) C) and D)
G) All of the above

Question 19

Lancaster 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 cost of capital is 8%, the projects have the same NPV.Given this information, which of the following statements is CORRECT?

Accepted Answer

A)   If the cost of capital is 9%, Project A's NPV will be higher than Project B's.
B)   If the cost of capital is 6%, Project B's NPV will be higher than Project A's.
C)   If the cost of capital is greater than 14%, Project A's IRR will exceed Project B's.
D)   If the cost of capital is 9%, Project B's NPV will be higher than Project A's.
E)   If the cost of capital is 13%, Project A's NPV will be higher than Project B's.F) B) and D)
G) A) and B)

Question 20

Consider projects S and L.Both have normal cash flows, and the projects have the same risk, hence both are evaluated with the same cost of capital, 10%.However, S has a higher IRR than L.Which of the following statements is CORRECT?

Accepted Answer

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

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

Which of the following statements is CORRECT?

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

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

Correct Answer
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Correct Answer
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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.

Correct Answer
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Both the regular and the modified IRR (MIRR) methods have wide appeal to professors, but most business executives prefer the NPV method to either of the IRR methods.

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

Correct Answer
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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.

Correct Answer
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Consider projects S and L.Both have normal cash flows, and the projects have the same risk, hence both are evaluated with the same cost of capital, 10%.However, S has a higher IRR than L.Which of the following statements is CORRECT?

Correct Answer
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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.

Correct Answer
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Suzanne's Cleaners is considering a project that has the following cash flow data.What is the project's payback? $\begin{array} { l c c c c c c } \text { Year } & 0 & 1 & 2 & 3 & 4 & 5 \\\hline \text { Cash flows } & - \$ 1,100 & \$ 300 & \$ 310 & \$ 320 & \$ 330 & \$ 340\end{array}$

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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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.

Correct Answer
verified

Correct Answer
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McGlothin Inc.is considering a project that has the following cash flow data.What is the project's payback? $\begin{array} { l c c c c } \text { Year } & 0 & 1 & 2 & 3 \\\hline \text { Cash flows } & - \$ 1,150 & \$ 500 & \$ 500 & \$ 500\end{array}$

Correct Answer
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Correct Answer
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Exam 10: The Basics of Capital Budgeting: Evaluating Cash Flows

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Both the regular and the modified IRR (MIRR) methods have wide appeal to professors, but most business executives prefer the NPV method to either of the IRR methods.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Consider projects S and L.Both have normal cash flows, and the projects have the same risk, hence both are evaluated with the same cost of capital, 10%.However, S has a higher IRR than L.Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct Answer
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