Question 1

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?

Accepted Answer

A)   The crossover rate must be less than 10%.
B)   The crossover rate 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.
E)   Project X is larger in the sense that it has the higher initial cost.F) D) and E)
G) B) and C)

Question 2

Which of the following statements is CORRECT?

Accepted Answer

A)   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.
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 favor the MIRR over the regular IRR.
D)   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.
E)   The percentage difference between the MIRR and the IRR is equal to the project's WACC.F) C) and D)
G) A) and D)

Question 3

Which of the following statements is CORRECT?

Accepted Answer

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 that 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 higher IRR probably has more of its cash flows coming in the later years.
E)   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.F) A) and C)
G) A) and B)

Question 4

Barry Company 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. WACC: $\quad 12.00 \%$
$\begin{array}{c}
\begin{array}{lll}
 \text {Year}\
\text {Cash flows}
\end{array}
\begin{array}{lll}
 0 \
\hline -\$1,100 
\end{array}
\begin{array}{lll}
1 \
\hline \$400
\end{array}
\begin{array}{lll}
2 \
\hline \$390
\end{array}
\begin{array}{lll}
3 \
\hline \$380
\end{array}
\begin{array}{lll}
4 \
\hline \$370
\end{array}
\end{array}$

a. $\$ 250.15$
b. $\$ 277.94$
c. $\$ 305.73$
d. $\$ 336.31$
e. $\$ 369.94$

Accepted Answer

The answer of Barry Company is considering a project that...

Question 5

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. $\begin{array}{c}
\begin{array}{lll}
 \text {Year}\
\text {Cash flows}
\end{array}
\begin{array}{lll}
 0 \
\hline -\$850 
\end{array}
\begin{array}{lll}
1 \
\hline \$300
\end{array}
\begin{array}{lll}
2 \
\hline \$290
\end{array}
\begin{array}{lll}
3 \
\hline \$280
\end{array}
\begin{array}{lll}
4 \
\hline \$270
\end{array}
\end{array}$

a $13.13 \%$
b. $14.44 \%$
c. $15.89 \%$
d. $17.48 \%$
e. $19.22 \%$

Accepted Answer

The answer of Simkins Renovations Inc. is considering a project...

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

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?

Accepted Answer

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 D)
G) B) and D)

Question 8

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.F) C) and D)
G) D) and E)

Question 9

A conflict will exist between the NPV and IRR methods, when used to evaluate two equally risky but mutually exclusive projects, if the projects' cost of capital is less than the rate at which the projects' NPV profiles cross.

Accepted Answer

A) True 
 B)False

Question 10

Warr Company 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 or negative, in both cases it will be rejected. $\begin{array}{c}
\begin{array}{lll}
 \text {Year}\
\text {Cash flows}
\end{array}
\begin{array}{lll}
 0 \
\hline -\$1,050
\end{array}
\begin{array}{lll}
1 \
\hline \$400
\end{array}
\begin{array}{lll}
2 \
\hline \$400
\end{array}
\begin{array}{lll}
3 \
\hline \$400
\end{array}
\begin{array}{lll}
4 \
\hline \$400
\end{array}
\end{array}$

a. $14.05 \%$
b. $15.61 \%$
c. $17.34 \%$
d. $19.27 \%$
e. $21.20 \%$

Accepted Answer

The answer of Warr Company is considering a project that...

Question 11

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

Accepted Answer

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) None of the above
G) All of the above

Question 12

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.

Accepted Answer

A) True 
 B)False

Question 13

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?

Accepted Answer

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 greater than 14%, Project A's IRR will exceed Project B's.
E)   If the WACC is 9%, Project B's NPV will be higher than Project A's.F) A) and D)
G) None of the above

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

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 16

Suppose a firm relies exclusively on the payback method when making capital budgeting decisions, and it sets a 4-year payback regardless of economic conditions. Other things held constant, which of the following statements is most likely to be true?

Accepted Answer

A)   It will accept too many short-term projects and reject too many long-term projects (as judged by the NPV) .
B)   It will accept too many long-term projects and reject too many short-term projects (as judged by the NPV) .
C)   The firm will accept too many projects in all economic states because a 4-year payback is too low.
D)   The firm will accept too few projects in all economic states because a 4-year payback is too high.
E)   If the 4-year payback results in accepting just the right set of projects under average economic conditions, then this payback will result in too few long-term projects when the economy is weak.F) C) and D)
G) B) and E)

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

Project S has a pattern of high cash flows in its early life, while Project L has a longer life, with large cash flows late in its life. Neither has negative cash flows after Year 0, and at the current cost of capital, the two projects have identical NPVs. Now suppose interest rates and money costs decline. Other things held constant, this change will cause L to become preferred to S.

Accepted Answer

A) True 
 B)False

Question 19

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.F) B) and D)
G) None of the above

Question 20

The regular payback method is deficient in that it does not take account of cash flows beyond the payback period. The discounted payback method corrects this fault.

Accepted Answer

A) True 
 B)False

Exam 11: The Basics of Capital Budgeting

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

Correct Answer
verified

Suppose a firm relies exclusively on the payback method when making capital budgeting decisions, and it sets a 4-year payback regardless of economic conditions. Other things held constant, which of the following statements is most likely to be true?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Correct Answer
verified

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.

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

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

Correct Answer
verified

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

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

The regular payback method is deficient in that it does not take account of cash flows beyond the payback period. The discounted payback method corrects this fault.

Correct Answer
verified

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.

Correct Answer
verified

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?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

A conflict will exist between the NPV and IRR methods, when used to evaluate two equally risky but mutually exclusive projects, if the projects' cost of capital is less than the rate at which the projects' NPV profiles cross.

Correct Answer
verified

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

Correct Answer
verified

Correct Answer
verified

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?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Correct Answer
verified

Exam 11: The Basics of Capital Budgeting

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

Correct AnswerverifiedShow Answer

Suppose a firm relies exclusively on the payback method when making capital budgeting decisions, and it sets a 4-year payback regardless of economic conditions. Other things held constant, which of the following statements is most likely to be true?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The regular payback method is deficient in that it does not take account of cash flows beyond the payback period. The discounted payback method corrects this fault.

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

A conflict will exist between the NPV and IRR methods, when used to evaluate two equally risky but mutually exclusive projects, if the projects' cost of capital is less than the rate at which the projects' NPV profiles cross.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Correct Answer
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