Question 1

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 C

Question 2

A firm should never accept a project if its acceptance would lead to an increase in the firm's cost of capital (its WACC).

Accepted Answer

A) True 
 B)False  False

Question 3

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  False

Question 4

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 5

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 6

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 7

Both the regular and the modified IRR (MIRR) methods have wide appeal to professors, but most business executives prefer the NPV method to either of the IRR methods.

Accepted Answer

A) True 
 B)False

Question 8

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 9

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 10

Which of the following statements is CORRECT?

Accepted Answer

A)  For a project with normal cash flows, any change in the WACC will change both the NPV and the IRR. 
B)  To find the MIRR, we first compound cash flows at the regular IRR to find the TV, and then we discount the TV at the WACC to find the PV. 
C)  The NPV and IRR methods both assume that cash flows can be reinvested at the WACC. However, the MIRR method assumes reinvestment at the MIRR itself. 
D)  If two projects have the same cost, and if their NPV profiles cross in the upper right quadrant, then the project with the higher IRR probably has more of its cash flows coming in the later years. 
E)  If two projects have the same cost, and if their NPV profiles cross in the upper right quadrant, then the project with the lower IRR probably has more of its cash flows coming in the later years. 
A)  For a project with normal cash flows, any change in the WACC will change both the NPV and the IRR. 
B)  To find the MIRR, we first compound cash flows at the regular IRR to find the TV, and then we discount the TV at the WACC to find the PV. 
C)  The NPV and IRR methods both assume that cash flows can be reinvested at the WACC. However, the MIRR method assumes reinvestment at the MIRR itself. 
D)  If two projects have the same cost, and if their NPV profiles cross in the upper right quadrant, then the project with the higher IRR probably has more of its cash flows coming in the later years. 
E)  If two projects have the same cost, and if their NPV profiles cross in the upper right quadrant, then the project with the lower IRR probably has more of its cash flows coming in the later years.

Question 11

Under certain conditions, a project may have more than one IRR. One such condition is when, in addition to the initial investment at time = 0, a negative cash flow (or cost) occurs at the end of the project's life.

Accepted Answer

A) True 
 B)False

Question 12

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 13

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 projected 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%

Question 14

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

Accepted Answer

A)  9.32% 
B)  10.35% 
C)  11.50% 
D)  12.78% 
E)  14.20% 
A)  9.32% 
B)  10.35% 
C)  11.50% 
D)  12.78% 
E)  14.20%

Question 15

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 projected 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 16

The NPV and IRR methods, when used to evaluate two equally risky but mutually exclusive projects, will lead to different accept/reject decisions and thus capital budgets if the cost of capital at which the projects' NPV profiles cross is greater than the projects' cost of capital.

Accepted Answer

A) True 
 B)False

Question 17

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 18

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 19

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 20

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

Accepted Answer

A)  13.42% 
B)  14.91% 
C)  16.56% 
D)  18.22% 
E)  20.04% 
A)  13.42% 
B)  14.91% 
C)  16.56% 
D)  18.22% 
E)  20.04%

Exam 11: The Basics of Capital Budgeting

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

A firm should never accept a project if its acceptance would lead to an increase in the firm's cost of capital (its WACC).

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?

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

Both the regular and the modified IRR (MIRR) methods have wide appeal to professors, but most business executives prefer the NPV method to either of the IRR methods.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Under certain conditions, a project may have more than one IRR. One such condition is when, in addition to the initial investment at time = 0, a negative cash flow (or cost) occurs at the end of the project's 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.

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 projected MIRR can be less than the WACC (and even negative), in which case it will be rejected.

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

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 projected NPV can be negative, in which case it will be rejected.

The NPV and IRR methods, when used to evaluate two equally risky but mutually exclusive projects, will lead to different accept/reject decisions and thus capital budgets if the cost of capital at which the projects' NPV profiles cross is greater than the projects' cost of capital.

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?

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

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

An Overview of Financial Management

Financial Markets and Institutions

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Bonds and Their Valuation

Bonds and Their Valuation

Risk and Rates of Return

Stocks and Their Valuation

The Cost of Capital

Cash Flow Estimation and Risk Analysis

Real Options and Other Topics in Capital Budgeting

Capital Structure and Leverage

Distributions to Shareholders: Dividends and

Working Capital Management

Financial Planning and Forecasting

Derivatives and Risk Management

Multinational Financial Management

Hybrid Financing: Preferred Stock, Leasing, Warrants, and Convertibles

Mergers and Acquisitions

Financial Management and Stock Equilibrium

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