Question 1

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. A

Question 2

Projects S and L are equally risky, mutually exclusive, and have normal cash flows. Project S has an IRR of 15%, while Project L's IRR is 12%. The two projects have the same NPV when the WACC is 7%. Which of the following statements is CORRECT?

Accepted Answer

A)  If the WACC is 10%, both projects will have positive NPVs. 
B)  If the WACC is 6%, Project S will have the higher NPV. 
C)  If the WACC is 13%, Project S will have the lower NPV. 
D)  If the WACC is 10%, both projects will have a negative NPV. 
E)  Project S's NPV is more sensitive to changes in WACC than Project L's. 
A)  If the WACC is 10%, both projects will have positive NPVs. 
B)  If the WACC is 6%, Project S will have the higher NPV. 
C)  If the WACC is 13%, Project S will have the lower NPV. 
D)  If the WACC is 10%, both projects will have a negative NPV. 
E)  Project S's NPV is more sensitive to changes in WACC than Project L's. A

Question 3

Which of the following statements is CORRECT?

Accepted Answer

A)  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. 
B)  One advantage of the NPV over the IRR is that NPV assumes that cash flows will be reinvested at the WACC, whereas IRR assumes that cash flows are reinvested at the IRR. The NPV assumption is generally more appropriate. 
C)  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. 
D)  One advantage of the NPV over the MIRR method is that NPV discounts cash flows whereas the MIRR is based on undiscounted cash flows. 
E)  Since cash flows under the IRR and MIRR are both discounted at the same rate (the WAC
C) , these two methods always rank mutually exclusive projects in the same order. 
A)  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. 
B)  One advantage of the NPV over the IRR is that NPV assumes that cash flows will be reinvested at the WACC, whereas IRR assumes that cash flows are reinvested at the IRR. The NPV assumption is generally more appropriate. 
C)  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. 
D)  One advantage of the NPV over the MIRR method is that NPV discounts cash flows whereas the MIRR is based on undiscounted cash flows. 
E)  Since cash flows under the IRR and MIRR are both discounted at the same rate (the WAC
C) , these two methods always rank mutually exclusive projects in the same order. B

Question 4

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. 
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.

Question 5

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 6

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 7

Normal Projects S and L have the same NPV when the discount rate is zero. However, Project S's cash flows come in faster than those of L. Therefore, we know that at any discount rate greater than zero, L will have the higher NPV.

Accepted Answer

A) True 
 B)False

Question 8

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 regular IRR is found by compounding the cash inflows at the WACC to find the terminal value (TV), then discounting this TV at the WACC. 
B)  A project's regular IRR is found by discounting the cash inflows at the WACC to find the present value (PV), then compounding this PV to find the IRR. 
C)  If a project's IRR is greater than the WACC, then its NPV must be negative. 
D)  To find a project's IRR, we must solve for the discount rate that causes the PV of the inflows to equal the PV of the project's costs. 
E)  To find a project's IRR, we must find a discount rate that is equal to the WACC. 
A)  A project's regular IRR is found by compounding the cash inflows at the WACC to find the terminal value (TV), then discounting this TV at the WACC. 
B)  A project's regular IRR is found by discounting the cash inflows at the WACC to find the present value (PV), then compounding this PV to find the IRR. 
C)  If a project's IRR is greater than the WACC, then its NPV must be negative. 
D)  To find a project's IRR, we must solve for the discount rate that causes the PV of the inflows to equal the PV of the project's costs. 
E)  To find a project's IRR, we must find a discount rate that is equal to the WACC.

Question 9

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 10

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. 
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.

Question 11

Other things held constant, an increase in the cost of capital will result in a decrease in a project's IRR.

Accepted Answer

A) True 
 B)False

Question 12

The internal rate of return is that discount rate that equates the present value of the cash outflows (or costs) with the present value of the cash inflows.

Accepted Answer

A) True 
 B)False

Question 13

Four 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 14

Small businesses make less use of DCF capital budgeting techniques than large businesses. This may reflect a lack of knowledge on the part of small firms' managers, but it may also reflect a rational conclusion that the costs of using DCF analysis outweigh the benefits of these methods for very small firms.

Accepted Answer

A) True 
 B)False

Question 15

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 generally found by compounding the cash inflows at the WACC to find the terminal value (TV), then discounting the TV at the IRR to find its PV. 
B)  The higher the WACC used to calculate the NPV, the lower the calculated NPV will be. 
C)  If a project's NPV is greater 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 NPVs of relatively risky projects should be found using relatively low WACCs. 
A)  A project's NPV is generally found by compounding the cash inflows at the WACC to find the terminal value (TV), then discounting the TV at the IRR to find its PV. 
B)  The higher the WACC used to calculate the NPV, the lower the calculated NPV will be. 
C)  If a project's NPV is greater 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 NPVs of relatively risky projects should be found using relatively low WACCs.

Question 16

Projects S and L both have normal cash flows, and the projects have the same risk, hence both are evaluated with the same WACC, 10%. However, S has a higher IRR than L. Which of the following statements is CORRECT?

Accepted Answer

A)  Project S must have a higher NPV than Project L. 
B)  If Project S has a positive NPV, Project L must also have a positive NPV. 
C)  If the WACC falls, each project's IRR will increase. 
D)  If the WACC increases, each project's IRR will decrease. 
E)  If Projects S and L have the same NPV at the current WACC, 10%, then Project L, the one with the lower IRR, would have a higher NPV if the WACC used to evaluate the projects declined. 
A)  Project S must have a higher NPV than Project L. 
B)  If Project S has a positive NPV, Project L must also have a positive NPV. 
C)  If the WACC falls, each project's IRR will increase. 
D)  If the WACC increases, each project's IRR will decrease. 
E)  If Projects S and L have the same NPV at the current WACC, 10%, then Project L, the one with the lower IRR, would have a higher NPV if the WACC used to evaluate the projects declined.

Question 17

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 18

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. 
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.

Question 19

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 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)  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 the MIRR will be less than the IRR. 
D)  If a project's IRR is greater than its WACC, then the MIRR will be greater than the IRR. 
E)  To find a project's MIRR, we compound cash inflows at the IRR and then discount the terminal value back to t = 0 at the WACC. 
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 the MIRR will be less than the IRR. 
D)  If a project's IRR is greater than its WACC, then the MIRR will be greater than the IRR. 
E)  To find a project's MIRR, we compound cash inflows at the IRR and then discount the terminal value back to t = 0 at the WACC.

Which of the following statements is CORRECT?

Projects S and L are equally risky, mutually exclusive, and have normal cash flows. Project S has an IRR of 15%, while Project L's IRR is 12%. The two projects have the same NPV when the WACC is 7%. Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

One advantage of the payback method for evaluating potential investments is that it provides information about a project's liquidity and risk.

Which of the following statements is CORRECT?

Normal Projects S and L have the same NPV when the discount rate is zero. However, Project S's cash flows come in faster than those of L. Therefore, we know that at any discount rate greater than zero, L will have the higher NPV.

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.

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.

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.

Other things held constant, an increase in the cost of capital will result in a decrease in a project's IRR.

The internal rate of return is that discount rate that equates the present value of the cash outflows (or costs) with the present value of the cash inflows.

Four 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?

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.

Projects S and L both have normal cash flows, and the projects have the same risk, hence both are evaluated with the same WACC, 10%. However, S has a higher IRR than L. 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 cash outflow at t = 0 followed by a series of positive cash flows.

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 outflow followed by a series of inflows.

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Bonds

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Exam 11: Capital Budgeting

Which of the following statements is CORRECT?

Projects S and L are equally risky, mutually exclusive, and have normal cash flows. Project S has an IRR of 15%, while Project L's IRR is 12%. The two projects have the same NPV when the WACC is 7%. Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

One advantage of the payback method for evaluating potential investments is that it provides information about a project's liquidity and risk.

Which of the following statements is CORRECT?

Normal Projects S and L have the same NPV when the discount rate is zero. However, Project S's cash flows come in faster than those of L. Therefore, we know that at any discount rate greater than zero, L will have the higher NPV.

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.

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.

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.

Other things held constant, an increase in the cost of capital will result in a decrease in a project's IRR.

The internal rate of return is that discount rate that equates the present value of the cash outflows (or costs) with the present value of the cash inflows.

Four 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?

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.

Projects S and L both have normal cash flows, and the projects have the same risk, hence both are evaluated with the same WACC, 10%. However, S has a higher IRR than L. 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 cash outflow at t = 0 followed by a series of positive cash flows.

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 outflow followed by a series of inflows.

Overview

Financial Markets

Financial Statements

Statement Analysis

Time Value of Money

Interest Rates

Bonds

Risk and Return

Stocks

Cost of Capital

Cash Flow and Risk

Real Options

Capital Structure

Dividends

Working Capital

Forecasting

Derivatives

Multinational

Hybrid Financing

Mergers

Filters