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

Which of the following statements is CORRECT?

Accepted Answer

A)   If a project has "normal" cash flows, then its IRR must be positive.
B)   If a project has "normal" cash flows, then its MIRR must be positive.
C)   If a project has "normal" cash flows, then it will have exactly two real IRRs.
D)   The definition of "normal" cash flows is that the cash flow stream has one or more negative cash flows followed by a stream of positive cash flows and then one negative cash flow at the end of the project's life.
E)   If a project has "normal" cash flows, then it can have only one real IRR, whereas a project with "nonnormal" cash flows might have more than one real IRR.F) None of the above
G) A) and B)

Question 3

Resnick Inc. is considering a project that has the following cash flow data. What is the project's payback?
$\begin{array}{c}
\begin{array}{lll}
 \text {Year}\
\text {Cash flows}
\end{array}
\begin{array}{lll}
 0 \
\hline -\$350
\end{array}
\begin{array}{lll}
1 \
\hline \$200
\end{array}
\begin{array}{lll}
2 \
\hline \$200
\end{array}
\begin{array}{lll}
3 \
\hline \$200
\end{array}
\end{array}$

a. $1.42$ years
b. $1.58$ years
c. $1.75$ years
d. $1.93$ years
e. $2.12$ years

Accepted Answer

The answer of Resnick Inc. is considering a project that...

Question 4

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 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

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.

Accepted Answer

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

Question 7

McCall Manufacturing has a WACC of 10%. The firm is considering two normal, equally risky, mutually exclusive, but not repeatable projects. The two projects have the same investment costs, but Project A has an IRR of 15%, while Project B has an IRR of 20%. Assuming the projects' NPV profiles cross in the upper right quadrant, which of the following statements is CORRECT?

Accepted Answer

A)   Each project must have a negative NPV.
B)   Since the projects are mutually exclusive, the firm should always select Project B.
C)   If the crossover rate is 8%, Project B will have the higher NPV.
D)   Only one project has a positive NPV.
E)   If the crossover rate is 8%, Project A will have the higher NPV.F) B) and D)
G) B) and E)

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 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.F) A) and C)
G) A) and B)

Question 9

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 10

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 IRR.

Accepted Answer

A) True 
 B)False

Question 11

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.

Accepted Answer

A) True 
 B)False

Question 12

You are on the staff of Camden Inc. The CFO believes project acceptance should be based on the NPV, but Steve Camden, the president, insists that no project should be accepted unless its IRR exceeds the project's risk-adjusted WACC. Now you must make a recommendation on a project that has a cost of $15,000 and two cash flows: $110,000 at the end of Year 1 and −$100,000 at the end of Year 2. The president and the CFO both agree that the appropriate WACC for this project is 10%. At 10%, the NPV is $2,355.37, but you find two IRRs, one at 6.33% and one at 527%, and a MIRR of 11.32%. Which of the following statements best describes your optimal recommendation, i.e., the analysis and recommendation that is best for the company and least likely to get you in trouble with either the CFO or the president?

Accepted Answer

A)   You should recommend that the project be rejected because its NPV is negative and its IRR is less than the WACC.
B)   You should recommend that the project be rejected because, although its NPV is positive, it has an IRR that is less than the WACC.
C)   You should recommend that the project be accepted because (1)  its NPV is positive and (2)  although it has two IRRs, in this case it would be better to focus on the MIRR, which exceeds the WACC. You should explain this to the president and tell him that that the firm's value will increase if the project is accepted.
D)   You should recommend that the project be rejected because (1)  its NPV is positive and (2)  it has two IRRs, one of which is less than the WACC, which indicates that the firm's value will decline if the project is accepted.
E)   You should recommend that the project be rejected because, although its NPV is positive, its MIRR is less than the WACC, and that indicates that the firm's value will decline if it is accepted.F) A) and E)
G) None of the above

Question 13

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.F) B) and E)
G) All of the above

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)   The longer a project's payback period, the more desirable the project is normally considered to be by this criterion.
B)   One drawback of the payback criterion for evaluating projects is that this method does not properly account for the time value of money.
C)   If a project's payback is positive, then the project should be rejected because it must have a negative NPV.
D)   The regular payback ignores cash flows beyond the payback period, but the discounted payback method overcomes this problem.
E)   If a company uses the same payback requirement to evaluate all projects, say it requires a payback of 4 years or less, then the company will tend to reject projects with relatively short lives and accept long-lived projects, and this will cause its risk to increase over time.F) A) and E)
G) A) and D)

Question 15

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. WACC: $\quad 10.00 \%$
$\begin{array}{c}
\begin{array}{lll}
 \text {Year}\
\text {Cash flows}
\end{array}
\begin{array}{lll}
 0 \
\hline -\$950 
\end{array}
\begin{array}{lll}
1 \
\hline \$500
\end{array}
\begin{array}{lll}
2 \
\hline \$400
\end{array}
\begin{array}{lll}
3 \
\hline \$300
\end{array}
\end{array}$

a $\$ 54.62$
b. $\$ 57.49$
c. $\$ 60.52$
d. $\$ 63.54$
e. $\$ 66.72$

Accepted Answer

The answer of Warnock Inc. is considering a project that...

Question 16

Simms Corp. 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. $\begin{array}{c}
\begin{array}{lll}
 \text {Year}\
\text {Cash flows}
\end{array}
\begin{array}{lll}
 0 \
\hline -\$1,000 
\end{array}
\begin{array}{lll}
1 \
\hline \$425
\end{array}
\begin{array}{lll}
2 \
\hline \$425
\end{array}
\begin{array}{lll}
3 \
\hline \$425
\end{array}
\end{array}$

a. $12.55 \%$
b. $13.21 \%$
c. $13.87 \%$
d. $14.56 \%$
e. $15.29 \%$

Accepted Answer

The answer of Simms Corp. is considering a project that...

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

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 found by compounding the cash inflows at the IRR to find the terminal value (TV) , then discounting the TV at the WACC.
B)   The lower the WACC used to calculate it, the lower the calculated NPV will be.
C)   If a project's NPV is less 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 NPV of a relatively low-risk project should be found using a relatively high WACC.F) A) and B)
G) A) and E)

Question 19

Mansi Inc. is considering a project that has the following cash flow data. What is the project's payback? $\begin{array}{c}
\begin{array}{lll}
 \text {Year}\
\text {Cash flows}
\end{array}
\begin{array}{lll}
 0 \
\hline -\$750
\end{array}
\begin{array}{lll}
1 \
\hline \$300
\end{array}
\begin{array}{lll}
2 \
\hline \$325
\end{array}
\begin{array}{lll}
3 \
\hline \$350
\end{array}
\end{array}$

a $1.91$ years
b. $2.12$ years
c. $2.36$ years
d. $2.59$ years
e. $2.85$ years

Accepted Answer

The answer of Mansi Inc. is considering a project that...

Question 20

Which of the following statements is CORRECT?

Accepted Answer

A)   One defect of the IRR method is that it does not take account of cash flows over a project's full life.
B)   One defect of the IRR method is that it does not take account of the time value of money.
C)   One defect of the IRR method is that it does not take account of the cost of capital.
D)   One defect of the IRR method is that it 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 is that it assumes that the cash flows to be received from a project can be reinvested at the IRR itself, and that assumption is often not valid.F) B) and D)
G) A) and B)

Exam 11: The Basics of Capital Budgeting

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.

Correct Answer
verified

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.

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

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
verified

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 IRR.

Correct Answer
verified

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
verified

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.

Correct Answer
verified

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
verified

Correct Answer
verified

Correct Answer
verified

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
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

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.

Correct Answer
verified

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.

Correct Answer
verified

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Exam 11: The Basics of Capital Budgeting

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.

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

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

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 IRR.

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

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.

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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