Exam 10: The Basics of Capital Budgeting: Evaluating Cash Flows

The 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.

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.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Markman & Sons is considering Projects S and L.These projects are mutually exclusive, equally risky, and not repeatable and their cash flows are shown below.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. :10.00\% Y ear 0 1 2 3 4 -\ 1,025 \ 650 \ 450 \ 250 \ 50 -\ 1,025 \ 100 \ 300 \ 500 \ 700

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.

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