Question 1

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

Accepted Answer

A) 1.61 years 
B) 1.79 years 
C) 1.99 years 
D) 2.22 years 
E) 2.44 years 
A) 1.61 years 
B) 1.79 years 
C) 1.99 years 
D) 2.22 years 
E) 2.44 years

Question 2

Mansi Inc.is considering a project that has the following cash flow data.What is the project's payback?

Accepted Answer

A) 1.91 years 
B) 2.12 years 
C) 2.36 years 
D) 2.59 years 
E) 2.85 years 
A) 1.91 years 
B) 2.12 years 
C) 2.36 years 
D) 2.59 years 
E) 2.85 years

Question 3

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. 
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.

Question 4

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. 
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.

Question 5

Sexton Inc.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, so no value will be lost if the IRR method is used.
$$\begin{array} { | l | l | l | l | l | l | l | } 
\hline \text { WACC: } & 10.25 \% & & & & & \
\hline \text { Year } & & 0 & 1 & 2 & 3 & 4 \
\hline C _ { S } & & - \$ 2,050 & \$ 750 & \$ 760 & \$ 770 & \$ 780 \
\hline C F _ { L } & & - \$ 4,300 & \$ 1,500 & \$ 1,518 & \$ 1,536 & \$ 1,554 \
\hline
\end{array}$$

Accepted Answer

A) $134.79 
B) $141.89 
C) $149.36 
D) $164.29 
E) $205.36 
A) $134.79 
B) $141.89 
C) $149.36 
D) $164.29 
E) $205.36

Question 6

Yonan Inc.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 shorter payback, some value may be forgone.How much value will be lost in this instance? Note that under some conditions choosing projects on the basis of the shorter payback will not cause value to be lost.
$$\begin{array}{l}
\text { WACC: } \quad 10.25 \%\
\begin{array} { c c c c c r } 
\text { Year } & 0 & 1 & 2 & 3 & 4 \
\hline  \mathrm { CF } _ { \mathrm { S } } & - \$ 950 & \$ 500 & \$ 800 & \$ 0 & \$ 0 \
\mathrm { CF } _ { \mathrm { L } } & - \$ 2,100 & \$ 400 & \$ 800 & \$ 800 & \$ 1,000
\end{array}
\end{array}$$

Accepted Answer

A) $24.14 
B) $26.82 
C) $29.80 
D) $33.11 
E) $36.42 
A) $24.14 
B) $26.82 
C) $29.80 
D) $33.11 
E) $36.42

Question 7

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) If Project A has a higher IRR than Project B, then Project A must have the lower NPV. 
B) If Project A has a higher IRR than Project B, then Project A must also have a higher NPV. 
C) The IRR calculation implicitly assumes that all cash flows are reinvested at the WACC. 
D) The IRR calculation implicitly assumes that cash flows are withdrawn from the business rather than being reinvested in the business. 
E) If a project has normal cash flows and its IRR exceeds its WACC, then the project's NPV must be positive. 
A) If Project A has a higher IRR than Project B, then Project A must have the lower NPV. 
B) If Project A has a higher IRR than Project B, then Project A must also have a higher NPV. 
C) The IRR calculation implicitly assumes that all cash flows are reinvested at the WACC. 
D) The IRR calculation implicitly assumes that cash flows are withdrawn from the business rather than being reinvested in the business. 
E) If a project has normal cash flows and its IRR exceeds its WACC, then the project's NPV must be positive.

Question 8

Inc.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.
$$\begin{array} { | l | r | r | r | r | r | } 
\hline \text { WACC: } &  { 10.75 \% } & & & \
\hline & 0 & 1 & 2 & 3 & 4 \
\hline C F F S _ { S } & - \$ 1,100 & \$ 375 & \$ 375 & \$ 375 & \$ 375 \
\hline C F L & - \$ 2,200 & \$ 725 & \$ 725 & \$ 725 & \$ 725 \
\hline
\end{array}$$

Accepted Answer

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

Question 9

Kosovski Company is considering Projects S and L, whose cash flows are shown below.These projects are mutually exclusive, equally risky, and are not repeatable.If the decision is made by choosing the project with the higher IRR, how much value will be forgone? Note that under some conditions choosing projects on the basis of the IRR will cause $0.00 value to be lost.
WACC: 7.75%
Year 0 1 2 3 4
CFS -$1,050 $675 $650
CFL -$1,050 $360 $360 $360 $360

Accepted Answer

A) $11.45 
B) $12.72 
C) $14.63 
D) $16.82 
E) $19.35 
A) $11.45 
B) $12.72 
C) $14.63 
D) $16.82 
E) $19.35

Question 10

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 11

of the following statements are truly disadvantages of the regular payback method, but one is not a disadvantage of this method.Which one is NOT a disadvantage of the payback method?

Accepted Answer

A) Lacks an objective, market-determined benchmark for making decisions. 
B) Ignores cash flows beyond the payback period. 
C) Does not directly account for the time value of money. 
D) Does not provide any indication regarding a project's liquidity or risk. 
E) Does not take account of differences in size among projects. 
A) Lacks an objective, market-determined benchmark for making decisions. 
B) Ignores cash flows beyond the payback period. 
C) Does not directly account for the time value of money. 
D) Does not provide any indication regarding a project's liquidity or risk. 
E) Does not take account of differences in size among projects.

Question 12

increase in the firm's WACC will decrease projects' NPVs, which could change the accept/reject decision for any potential project.However, such a change would have no impact on projects' IRRs.Therefore, the accept/reject decision under the IRR method is independent of the cost of capital.

Accepted Answer

A) True 
 B)False

Question 13

primary reason that the NPV method is conceptually superior to the IRR method for evaluating mutually exclusive investments is that multiple IRRs may exist, and when that happens, we don't know which IRR is relevant.

Accepted Answer

A) True 
 B)False

Question 14

Drilling Inc.is considering Projects S and L, whose cash flows are shown below.These projects are mutually exclusive, equally risky, and not repeatable.The CEO believes the IRR is the best selection criterion, while the CFO advocates the MIRR.If the decision is made by choosing the project with the higher IRR rather than the one with the higher MIRR, how much, if any, value will be forgone.In other words, what's the NPV of the chosen project versus the maximum possible NPV? Note that (1) "true value" is measured by NPV, and (2) under some conditions the choice of IRR vs.MIRR will have no effect on the value lost.

$$\begin{array}{l}
\text { WACC: } 9.00 \%\
\begin{array} { | l | l | l | l | l | l | } 
\hline & 0 & 1 & 2 & 3 & 4 \
\hline \text { CFS } & - \$ 1,100 & \$ 550 & \$ 600 & \$ 100 & \$ 100 \
\hline \text { CFL } & - \$ 2,750 & \$ 725 & \$ 725 & \$ 800 & \$ 1,400 \
\hline
\end{array}
\end{array}$$

Accepted Answer

A) $185.90 
B) $197.01 
C) $208.11 
D) $219.22 
E) $230.32 
A) $185.90 
B) $197.01 
C) $208.11 
D) $219.22 
E) $230.32

Question 15

Which of the following statements is CORRECT?

Accepted Answer

A) For a project to have more than one IRR, then both IRRs must be greater than the WACC. 
B) If two projects are mutually exclusive, then they are likely to have multiple IRRs. 
C) If a project is independent, then it cannot have multiple IRRs. 
D) Multiple IRRs can occur only if the signs of the cash flows change more than once. 
E) If a project has two IRRs, then the smaller one is the one that is most relevant, and it should be accepted and relied upon. 
A) For a project to have more than one IRR, then both IRRs must be greater than the WACC. 
B) If two projects are mutually exclusive, then they are likely to have multiple IRRs. 
C) If a project is independent, then it cannot have multiple IRRs. 
D) Multiple IRRs can occur only if the signs of the cash flows change more than once. 
E) If a project has two IRRs, then the smaller one is the one that is most relevant, and it should be accepted and relied upon.

Question 16

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

Question 17

Projects C and D are mutually exclusive and have normal cash flows.Project C has a higher NPV if the WACC is less than 12%, whereas Project D has a higher NPV if the WACC exceeds 12%.Which of the following statements is CORRECT?

Accepted Answer

A) Project D probably has a higher IRR. 
B) Project D is probably larger in scale than Project C. 
C) Project C probably has a faster payback. 
D) Project C probably has a higher IRR. 
E) The crossover rate between the two projects is below 12%. 
A) Project D probably has a higher IRR. 
B) Project D is probably larger in scale than Project C. 
C) Project C probably has a faster payback. 
D) Project C probably has a higher IRR. 
E) The crossover rate between the two projects is below 12%.

Question 18

Projects A and B have identical expected lives and identical initial cash outflows (costs)Which of the following statements is CORRECT?

Accepted Answer

A) More of Project A's cash flows occur in the later years. 
B) More of Project B's cash flows occur in the later years. 
C) We must have information on the cost of capital in order to determine which project has the larger early cash flows. 
D) The NPV profile graph is inconsistent with the statement made in the problem. 
E) The crossover rate, i.e., the rate at which Projects A and B have the same NPV, is greater than either project's IRR. 
A) More of Project A's cash flows occur in the later years. 
B) More of Project B's cash flows occur in the later years. 
C) We must have information on the cost of capital in order to determine which project has the larger early cash flows. 
D) The NPV profile graph is inconsistent with the statement made in the problem. 
E) The crossover rate, i.e., the rate at which Projects A and B have the same NPV, is greater than either project's IRR.

Question 19

Stern Associates is considering a project that has the following cash flow data.What is the project's payback?

Accepted Answer

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

Question 20

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 regular payback 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. 
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 regular payback 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.

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

Mansi Inc.is considering a project that has the following cash flow data.What is the project's payback?

Which of the following statements is CORRECT?

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

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.

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.

of the following statements are truly disadvantages of the regular payback method, but one is not a disadvantage of this method.Which one is NOT a disadvantage of the payback method?

increase in the firm's WACC will decrease projects' NPVs, which could change the accept/reject decision for any potential project.However, such a change would have no impact on projects' IRRs.Therefore, the accept/reject decision under the IRR method is independent of the cost of capital.

primary reason that the NPV method is conceptually superior to the IRR method for evaluating mutually exclusive investments is that multiple IRRs may exist, and when that happens, we don't know which IRR is relevant.

Which of the following statements is CORRECT?

Projects C and D are mutually exclusive and have normal cash flows.Project C has a higher NPV if the WACC is less than 12%, whereas Project D has a higher NPV if the WACC exceeds 12%.Which of the following statements is CORRECT?

Projects A and B have identical expected lives and identical initial cash outflows (costs)Which of the following statements is CORRECT?

Stern Associates is considering a project that has the following cash flow data.What is the project's payback?

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.

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

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

Mansi Inc.is considering a project that has the following cash flow data.What is the project's payback?

Which of the following statements is CORRECT?

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

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.

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.

of the following statements are truly disadvantages of the regular payback method, but one is not a disadvantage of this method.Which one is NOT a disadvantage of the payback method?

increase in the firm's WACC will decrease projects' NPVs, which could change the accept/reject decision for any potential project.However, such a change would have no impact on projects' IRRs.Therefore, the accept/reject decision under the IRR method is independent of the cost of capital.

primary reason that the NPV method is conceptually superior to the IRR method for evaluating mutually exclusive investments is that multiple IRRs may exist, and when that happens, we don't know which IRR is relevant.

Which of the following statements is CORRECT?

Projects C and D are mutually exclusive and have normal cash flows.Project C has a higher NPV if the WACC is less than 12%, whereas Project D has a higher NPV if the WACC exceeds 12%.Which of the following statements is CORRECT?

Projects A and B have identical expected lives and identical initial cash outflows (costs)Which of the following statements is CORRECT?

Stern Associates is considering a project that has the following cash flow data.What is the project's payback?

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.

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