Question 1

If you were evaluating two mutually exclusive projects for a firm with a zero cost of capital, the payback method and NPV method would always lead to the same decision on which project to undertake.

Accepted Answer

A) True 
 B)False

Question 2

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 3

Martin Manufacturing is considering two normal, equally risky, mutually exclusive, but not repeatable projects. Martin's cost of capital is 10%. 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)   since the projects are mutually exclusive, the firm should always select project b.
B)   if the crossover rate is 8%, project b will have the higher npv.
C)   only one project has a positive npv.
D)   if the crossover rate is 8%, project a will have the higher npv.
E)   each project must have a negative npv.F) A) and D)
G) B) and C)

Question 4

Modern Refurbishing Inc. is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's IRR can be less than the cost of capital (and even negative) , in which case it will be rejected. 
  Year 01234 Cash flows −$850300290280270\begin{array} { l c c c c c } 	ext { Year } & 0 & 1 & 2 & 3 & 4 \	ext { Cash flows } & - \$ 850 & 300 & 290 & 280 & 270\end{array} Year  Cash flows ​0−$850​1300​2290​3280​4270​

Accepted Answer

A)   13.13%
B)   14.44%
C)   15.89%
D)   17.48%
E)   19.22% F) C) and D)
G) D) and E)

Question 5

Silverman Co. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the higher MIRR rather than the one with the higher NPV, how much value will be forgone? Note that under some conditions choosing projects on the basis of the MIRR will cause $0.00 value to be lost.  r:8.75% Year 01234CFS−$1,100$375$375$375$375CFL−$2,200$725$725$725$725\begin{array}{cccccc}{r}{: 8.75 \%} & & & \	ext { Year } & 0 & 1 & 2 & 3 & 4 \ \mathrm{CF}_{\mathrm{S}} & -\$ 1,100 & \$ 375 & \$ 375 & \$ 375 & \$ 375 \\mathrm{CF}_{\mathrm{L}} & -\$ 2,200 & \$ 725 & \$ 725 & \$ 725 & \$ 725\end{array}r:8.75% Year CFS​CFL​​0−$1,100−$2,200​1$375$725​2$375$725​3$375$725​4$375$725​

Accepted Answer

A)   $32.12
B)   $35.33
C)   $38.87
D)   $40.15
E)   $42.16 F) B) and D)
G) A) and E)

Question 6

Patterson Co. is considering a project that has the following cash flow and cost of capital (r)  data. What is the project's NPV? Note that a project's expected NPV can be negative, in which case it will be rejected.  r10.00% Year 0123 Cash flows −$950$500$400$300\begin{array}{lcccc}r & 10.00 \% \	ext { Year } & 0 & 1 & 2 & 3 \	ext { Cash flows } & -\$ 950 & \$ 500 & \$ 400 & \$ 300\end{array}r Year  Cash flows ​10.00%0−$950​1$500​2$400​3$300​

Accepted Answer

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

Question 7

When considering two mutually exclusive projects, the firm should always select the project whose internal rate of return is the highest, . This statement is true regardless of whether the projects can be repeated or not.

Accepted Answer

A) True 
 B)False

Question 8

The IRR of normal Project X is greater than the IRR of normal Project Y, and both IRRs are greater than zero. Also, the NPV of X is greater than the NPV of Y at the cost of capital. If the two projects are mutually exclusive, Project X should definitely be selected, and the investment made, provided we have confidence in the data. Put another way, it is impossible to draw NPV profiles that would suggest not accepting Project X.

Accepted Answer

A) True 
 B)False  False

Question 9

Dickson Co. is considering a project that has the following cash flow and cost of capital (r)  data. What is the project's NPV? Note that a project's expected NPV can be negative, in which case it will be rejected.  r12.00% Year 012345 Cash flows −$1,100$400$390$380$370$360\begin{array}{lcccccc}r & 12.00 \% & & & & & \	ext { Year }  & 0 & 1 & 2 & 3 & 4 & 5 \ 	ext { Cash flows }& -\$ 1,100 & \$ 400 & \$ 390 & \$ 380 & \$ 370 & \$ 360\end{array}r Year  Cash flows ​12.00%0−$1,100​1$400​2$390​3$380​4$370​5$360​

Accepted Answer

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

Question 10

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) D) and E)
G) All of the above D

Question 11

Which of the following statements is CORRECT?

Accepted Answer

A)   one advantage of the npv over the irr is that npv assumes that cash flows will be reinvested at the cost of capital, whereas irr assumes that cash flows are reinvested at the irr. the npv assumption is generally more appropriate.
B)   one advantage of the npv over the mirr method is that npv takes account of cash flows over a project's full life whereas mirr does not.
C)   one advantage of the npv over the mirr method is that npv discounts cash flows whereas the mirr is based on undiscounted cash flows.
D)   since cash flows under the irr and mirr are both discounted at the same rate (the cost of capital) , these two methods always rank mutually exclusive projects in the same order.
E)   one advantage of the npv over the irr is that npv takes account of cash flows over a project's full life whereas irr does not.F) B) and D)
G) All of the above

Question 12

Worthington Inc. is considering a project that has the following cash flow data. What is the project's payback?
   Year 0123 Cash flows −$500$150200$300\begin{array} { l c c c c } 	ext { Year } & 0 & 1 & 2 & 3 \	ext { Cash flows } & - \$ 500 & \$ 150 & 200 & \$ 300\end{array} Year  Cash flows ​0−$500​1$150​2200​3$300​

Accepted Answer

A)   2.03 years
B)   2.25 years
C)   2.50 years
D)   2.75 years
E)   3.03 years F) C) and D)
G) A) and B)

Question 13

Nichols Inc. is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's IRR can be less than the cost of capital or negative, in both cases it will be rejected.   Year 012345 Cash flows −$1250$325$325$325$325$325\begin{array}{cccccccc}	ext { Year } & 0 & 1 & 2 & 3 & 4 & 5 \	ext { Cash flows }& -\$ 1250 & \$ 325 & \$ 325 & \$ 325 & \$ 325 & \$ 325\end{array} Year  Cash flows ​0−$1250​1$325​2$325​3$325​4$325​5$325​

Accepted Answer

A)   9.43%
B)   9.91%
C)   10.40%
D)   10.92%
E)   11.47% F) B) and E)
G) All of the above

Question 14

You are on the staff of O'Hara Inc. The CFO believes project acceptance should be based on the NPV, but Andrew O'Hara, the president, insists that no project should be accepted unless its IRR exceeds the project's risk-adjusted cost of capital. 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 σ$100,000 at the end of Year 2. The president and the CFO both agree that the appropriate cost of capital 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, although its npv is positive, it has an irr that is less than the cost of capital.
B)   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 cost of capital. you should explain this to the president and tell him that the firm's value will increase if the project is accepted.
C)   you should recommend that the project be rejected. although its npv is positive it has two irrs, one of which is less than the cost of capital, which indicates that the firm's value will decline if the project is accepted.
D)   you should recommend that the project be rejected because, although its npv is positive, its mirr is less than the cost of capital, and that indicates that the firm's value will decline if it is accepted.
E)   you should recommend that the project be rejected because its npv is negative and its irr is less than the cost of capital.F) C) and E)
G) A) and C)

Question 15

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) All of the above
G) D) and E)

Question 16

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 17

You are considering two mutually exclusive, equally risky, projects. Both have IRRs that exceed the cost of capital. 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 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. the same project will rank higher by both criteria.
B)   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. the same project will rank higher by both criteria.
C)   for a conflict to exist between npv and irr, the initial investment cost of one project must exceed the cost of the other.
D)   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.
E)   if the two projects' npv profiles do not cross, then there will be a sharp conflict as to which one should be selected.F) B) and C)
G) C) and D)

Question 18

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 19

Clifford 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 $50,000, annual cash flows of $16,000 for 5 years, and an IRR of 16.63%. 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 will cross, and the larger project will look better based on the npv at all positive values of the cost of capital.
B)   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 cost of capital is.
C)   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 cost of capital is less than the crossover rate.
D)   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 cost of capital is less than the crossover rate.
E)   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 the cost of capital.F) None of the above
G) A) and E)

Question 20

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

Exam 12: Capital Budgeting: Decision Criteria

If you were evaluating two mutually exclusive projects for a firm with a zero cost of capital, the payback method and NPV method would always lead to the same decision on which project to undertake.

Correct Answer
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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
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When considering two mutually exclusive projects, the firm should always select the project whose internal rate of return is the highest, . This statement is true regardless of whether the projects can be repeated or not.

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False

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B

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D

Which of the following statements is CORRECT?

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Worthington Inc. is considering a project that has the following cash flow data. What is the project's payback? $\begin{array} { l c c c c } \text { Year } & 0 & 1 & 2 & 3 \\\text { Cash flows } & - \$ 500 & \$ 150 & 200 & \$ 300\end{array}$

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Which of the following statements is CORRECT?

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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
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You are considering two mutually exclusive, equally risky, projects. Both have IRRs that exceed the cost of capital. 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
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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
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Exam 12: Capital Budgeting: Decision Criteria

If you were evaluating two mutually exclusive projects for a firm with a zero cost of capital, the payback method and NPV method would always lead to the same decision on which project to undertake.

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

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When considering two mutually exclusive projects, the firm should always select the project whose internal rate of return is the highest, . This statement is true regardless of whether the projects can be repeated or not.

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Correct AnswerverifiedFalse

Correct AnswerverifiedB

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Which of the following statements is CORRECT?

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Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

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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 AnswerverifiedShow Answer

You are considering two mutually exclusive, equally risky, projects. Both have IRRs that exceed the cost of capital. 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

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.

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False

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B

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D

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