Question 1

Which of the following statements is CORRECT?

Accepted Answer

A)  The shorter a project's payback period,the less desirable the project is normally considered to be by this criterion. 
B)  One drawback of the payback criterion is that this method does not take account of cash flows beyond the payback period. 
C)  If a project's payback is positive,then the project should be accepted because it must have a positive NPV. 
D)  The regular payback ignores cash flows beyond the payback period,but the discounted payback method overcomes this problem. 
E)  One drawback of the discounted payback is that this method does not consider the time value of money,while the regular payback overcomes this drawback. 
A)  The shorter a project's payback period,the less desirable the project is normally considered to be by this criterion. 
B)  One drawback of the payback criterion is that this method does not take account of cash flows beyond the payback period. 
C)  If a project's payback is positive,then the project should be accepted because it must have a positive NPV. 
D)  The regular payback ignores cash flows beyond the payback period,but the discounted payback method overcomes this problem. 
E)  One drawback of the discounted payback is that this method does not consider the time value of money,while the regular payback overcomes this drawback.

Question 2

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 3

A firm is considering Projects S and L,whose cash flows are shown below.These projects are mutually exclusive,equally risky,and not repeatable.The CEO wants to use the IRR criterion,while the CFO favors the NPV method.You were hired to advise the firm on the best procedure.If the wrong decision criterion is used,how much potential value would the firm lose? $\text { WACC: } \quad 6.75 \%$
$\begin{array}{llllll}&0&1&2&3&4\\hline
\mathrm{CF}_{\mathrm{S}} & -\$ 1,025 & \$ 380 & \$ 380 & \$ 380 & \$ 380 \
\mathrm{CF}_{\mathrm{L}} & -\$ 2,150 & \$ 765 & \$ 765 & \$ 765 & \$ 765
\end{array}$

Accepted Answer

A)  $214.44 
B)  $186.47 
C)  $218.17 
D)  $182.74 
E)  $220.03 
A)  $214.44 
B)  $186.47 
C)  $218.17 
D)  $182.74 
E)  $220.03

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

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

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.

Accepted Answer

A) True 
 B)False

Question 7

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.

Which of the following statements is CORRECT?

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.

Assume a project has normal cash flows.All else equal,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.

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.

An Overview of Financial Management

Financial Markets and Institutions

Financial Statements,cash Flow and Taxes

Analysis of Financial Statements

Time Value of Money

Interest Rates

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 Share Repurchases

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

Filters

Exam 11: The Basics of Capital Budgeting

Which of the following statements is CORRECT?

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.

Assume a project has normal cash flows.All else equal,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.

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.

An Overview of Financial Management

Financial Markets and Institutions

Financial Statements,cash Flow and Taxes

Analysis of Financial Statements

Time Value of Money

Interest Rates

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 Share Repurchases

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

Filters