Question 1

phenomenon called "multiple internal rates of return" arises when two or more mutually exclusive projects that have different lives are compared to one another.

Accepted Answer

A) True 
 B)False

Question 2

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. 
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.

Question 3

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. 
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.

Question 4

Harry's Inc.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 expected NPV is negative, it should be rejected.

Accepted Answer

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

Question 5

last month, Lloyd's Systems analyzed the project whose cash flows are shown below.However, before the decision to accept or reject the project took place, the Federal Reserve 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 expected NPV can be negative, in which case it should be rejected.

$$\begin{array} { | l | l | l | l | l | } 
\hline \text { Old WACC: } & 10.00 \% & & \text { New WACC: } & 12.50 \% \
\hline \text { Year } & 0 & 1 & 2 & 3 \
\hline \text { Cash flows } & - \$ 1,000 & \$ 410 & \$ 410 & \$ 410 \
\hline
\end{array}$$

Accepted Answer

A) -$18.89 
B) -$19.88 
C) -$20.93 
D) -$22.03 
E) -$23.13 
A) -$18.89 
B) -$19.88 
C) -$20.93 
D) -$22.03 
E) -$23.13

Question 6

Assuming that their NPVs based on the firm's cost of capital are equal, the NPV of a project whose cash flows accrue relatively rapidly will be more sensitive to changes in the discount rate than the NPV of a project whose cash flows come in later in its life.

Accepted Answer

A) True 
 B)False

Question 7

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. 
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.

Question 8

Which of the following statements is CORRECT?

Accepted Answer

A) The MIRR and NPV decision criteria can never conflict. 
B) The IRR method can never be subject to the multiple IRR problem, while the MIRR method can be. 
C) One reason some people prefer the MIRR to the regular IRR is that the MIRR is based on a generally more reasonable reinvestment rate assumption. 
D) The higher the WACC, the shorter the discounted payback period. 
E) The MIRR method assumes that cash flows are reinvested at the crossover rate. 
A) The MIRR and NPV decision criteria can never conflict. 
B) The IRR method can never be subject to the multiple IRR problem, while the MIRR method can be. 
C) One reason some people prefer the MIRR to the regular IRR is that the MIRR is based on a generally more reasonable reinvestment rate assumption. 
D) The higher the WACC, the shorter the discounted payback period. 
E) The MIRR method assumes that cash flows are reinvested at the crossover rate.

Question 9

Moerdyk & 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 IRR, how much value will be forgone? Note that under certain conditions choosing projects on the basis of the IRR will not cause any value to be lost because the project with the higher IRR will also have the higher NPV, i.e., no conflict will exist.

WACC: 8.75% 0 1 2 3 4 
CFS -$1,125 $650 $450 $250 $50 
CFL -$1,025 $50 $220 $500 $700

Accepted Answer

A) $5.47 
B) $6.02 
C) $6.62 
D) $7.29 
E) $7.82 
A) $5.47 
B) $6.02 
C) $6.62 
D) $7.29 
E) $7.82

Question 10

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 the firm's value will increase if the project is accepted. 
D) You should recommend that the project be rejected.Although its NPV is positive 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. 
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 the firm's value will increase if the project is accepted. 
D) You should recommend that the project be rejected.Although its NPV is positive 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.

Question 11

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 12

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 cash flows over a project's full life. 
B) One defect of the IRR method versus the NPV is that the IRR does not take account of the time value of money. 
C) One defect of the IRR method versus the NPV is that the IRR does not take account of the cost of capital. 
D) 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. 
E) 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. 
A) 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. 
B) One defect of the IRR method versus the NPV is that the IRR does not take account of the time value of money. 
C) One defect of the IRR method versus the NPV is that the IRR does not take account of the cost of capital. 
D) 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. 
E) 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.

Question 13

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

Accepted Answer

A) 1.88 years 
B) 2.09 years 
C) 2.29 years 
D) 2.52 years 
E) 2.78 years 
A) 1.88 years 
B) 2.09 years 
C) 2.29 years 
D) 2.52 years 
E) 2.78 years

Question 14

Computer Systems 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 WACC (and even negative), in which case it will be rejected.

Accepted Answer

A) 9.70% 
B) 10.78% 
C) 11.98% 
D) 13.31% 
E) 14.64% 
A) 9.70% 
B) 10.78% 
C) 11.98% 
D) 13.31% 
E) 14.64%

Question 15

Which of the following statements is CORRECT?

Accepted Answer

A) The internal rate of return method (IRR) is generally regarded by academics as being the best single method for evaluating capital budgeting projects. 
B) The payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects. 
C) The discounted payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects. 
D) The net present value method (NPV) is generally regarded by academics as being the best single method for evaluating capital budgeting projects. 
E) The modified internal rate of return method (MIRR) is generally regarded by academics as being the best single method for evaluating capital budgeting projects. 
A) The internal rate of return method (IRR) is generally regarded by academics as being the best single method for evaluating capital budgeting projects. 
B) The payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects. 
C) The discounted payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects. 
D) The net present value method (NPV) is generally regarded by academics as being the best single method for evaluating capital budgeting projects. 
E) The modified internal rate of return method (MIRR) is generally regarded by academics as being the best single method for evaluating capital budgeting projects.

Question 16

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 17

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 18

Cornell Enterprises is considering a project that has the following cash flow and WACC data.What is the project's NPV? Note that a project's expected NPV can be negative, in which case it will be rejected.

Accepted Answer

A) $ 92.37 
B) $ 96.99 
C) $101.84 
D) $106.93 
E) $112.28 
A) $ 92.37 
B) $ 96.99 
C) $101.84 
D) $106.93 
E) $112.28

Question 19

Which of the following statements is CORRECT?

Accepted Answer

A) The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the IRR. 
B) The NPV method assumes that cash flows will be reinvested at the risk-free rate, while the IRR method assumes reinvestment at the IRR. 
C) The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the risk-free rate. 
D) The NPV method does not consider all relevant cash flows, particularly cash flows beyond the payback period. 
E) The IRR method does not consider all relevant cash flows, particularly cash flows beyond the payback period. 
A) The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the IRR. 
B) The NPV method assumes that cash flows will be reinvested at the risk-free rate, while the IRR method assumes reinvestment at the IRR. 
C) The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the risk-free rate. 
D) The NPV method does not consider all relevant cash flows, particularly cash flows beyond the payback period. 
E) The IRR method does not consider all relevant cash flows, particularly cash flows beyond the payback period.

Question 20

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

Accepted Answer

A) 8.86% 
B) 9.84% 
C) 10.94% 
D) 12.15% 
E) 13.50% 
A) 8.86% 
B) 9.84% 
C) 10.94% 
D) 12.15% 
E) 13.50%

phenomenon called "multiple internal rates of return" arises when two or more mutually exclusive projects that have different lives are compared to one another.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Harry's Inc.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 expected NPV is negative, it should be rejected.

Assuming that their NPVs based on the firm's cost of capital are equal, the NPV of a project whose cash flows accrue relatively rapidly will be more sensitive to changes in the discount rate than the NPV of a project whose cash flows come in later in its life.

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.

Which of the following statements is CORRECT?

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.

Which of the following statements is CORRECT?

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

Computer Systems 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 WACC (and even negative), in which case it will be rejected.

Which of the following statements is CORRECT?

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.

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.

Cornell Enterprises is considering a project that has the following cash flow and WACC data.What is the project's NPV? Note that a project's expected NPV can be negative, in which case it will be rejected.

Which of the following statements is CORRECT?

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

Overview

Statements, CF, Taxes

Financial Analysis

Time Value of Money

Bonds

Risk and Return

Stocks

Financial Options

Cost of Capital

Cash Flow and Risk

Forecasting

Valuation, Governanc

Dividends

CAP Structure

Working Capital

Multinational

Filters

Exam 10: Capital Budgeting

phenomenon called "multiple internal rates of return" arises when two or more mutually exclusive projects that have different lives are compared to one another.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Harry's Inc.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 expected NPV is negative, it should be rejected.

Assuming that their NPVs based on the firm's cost of capital are equal, the NPV of a project whose cash flows accrue relatively rapidly will be more sensitive to changes in the discount rate than the NPV of a project whose cash flows come in later in its life.

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.

Which of the following statements is CORRECT?

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.

Which of the following statements is CORRECT?

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

Computer Systems 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 WACC (and even negative), in which case it will be rejected.

Which of the following statements is CORRECT?

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.

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.

Cornell Enterprises is considering a project that has the following cash flow and WACC data.What is the project's NPV? Note that a project's expected NPV can be negative, in which case it will be rejected.

Which of the following statements is CORRECT?

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

Overview

Statements, CF, Taxes

Financial Analysis

Time Value of Money

Bonds

Risk and Return

Stocks

Financial Options

Cost of Capital

Cash Flow and Risk

Forecasting

Valuation, Governanc

Dividends

CAP Structure

Working Capital

Multinational

Filters