Question 1

Which of the following statements is CORRECT?

Accepted Answer

A)  The NPV method assumes that cash flows will be reinvested at the risk-free rate, while the IRR method assumes reinvestment at the IRR. 
B)  The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the risk-free rate. 
C)  The NPV method does not consider all relevant cash flows, particularly cash flows beyond the payback period. 
D)  The IRR method does not consider all relevant cash flows, particularly cash flows beyond the payback period. 
E)  The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the IRR. 
A)  The NPV method assumes that cash flows will be reinvested at the risk-free rate, while the IRR method assumes reinvestment at the IRR. 
B)  The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the risk-free rate. 
C)  The NPV method does not consider all relevant cash flows, particularly cash flows beyond the payback period. 
D)  The IRR method does not consider all relevant cash flows, particularly cash flows beyond the payback period. 
E)  The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the IRR. E

Question 2

Dickson Co.is considering a project that has the following cash flow and WACC data.What is the project's NPV? Note that a project's expected NPV can be negative,in which case it will be rejected. $\begin{array}{lcccccc}
\text { YACC: } & 12.00 \% & & & & \
\text { Year } & 0 & 1 & 2 & 3 & 4 & 5 \
\text { Cash flows } & -\$ 1,100 & \$ 400 & \$ 390 & \$ 380 & \$ 370 & \$ 360
\end{array}$

Accepted Answer

A)  $250.15 
B)  $277.94 
C)  $305.73 
D)  $336.31 
E)  $369.94 
A)  $250.15 
B)  $277.94 
C)  $305.73 
D)  $336.31 
E)  $369.94 B

Question 3

The WACC for two mutually exclusive projects that are being considered is 8%.Project K has an IRR of 20% while Project R's IRR is 15%.The projects have the same NPV at the 8% current WACC.However,you believe that money costs and thus your WACC will also increase.You also think that the projects will not be funded until the WACC has increased,and their cash flows will not be affected by the change in economic conditions.Under these conditions,which of the following statements is CORRECT?

Accepted Answer

A)  You should delay a decision until you have more information on the projects, even if this means that a competitor might come in and capture this market. 
B)  You should recommend Project R, because at the new WACC it will have the higher NPV. 
C)  You should recommend Project K, because at the new WACC it will have the higher NPV. 
D)  You should recommend Project K because it has the higher IRR and will continue to have the higher IRR even at the new WACC. 
E)  You should reject both projects because they will both have negative NPVs under the new conditions. 
A)  You should delay a decision until you have more information on the projects, even if this means that a competitor might come in and capture this market. 
B)  You should recommend Project R, because at the new WACC it will have the higher NPV. 
C)  You should recommend Project K, because at the new WACC it will have the higher NPV. 
D)  You should recommend Project K because it has the higher IRR and will continue to have the higher IRR even at the new WACC. 
E)  You should reject both projects because they will both have negative NPVs under the new conditions. C

Question 4

Reed 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 expected NPV can be negative,in which case it will be rejected. $\begin{array}{lcccc}
\text { WACC: } & 10.00 \% \
\text { Year } & 0 & 1 & 2 & 3 \
\text { Cash flows } & -\$ 1.050 & \$ 450 & \$ 460 & \$ 470
\end{array}$

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 5

Which of the following statements is NOT a disadvantage of the regular payback method?

Accepted Answer

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

Question 6

When considering two mutually exclusive projects,the firm should always select the project whose internal rate of return is the highest,provided the projects have the same initial cost.This statement is true regardless of whether the projects can be repeated or not.

Accepted Answer

A) True 
 B)False

Question 7

Silverman Co.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. $\begin{array}{lccccc}
\text { WACC: } & 8.75 \% & & & \
\text { Year } & 0 & 1 & 2 & 3 & 4 \
\mathrm{CF}_{\mathrm{S}} & -\$ 1,100 & \$ 375 & \$ 375 & \$ 375 & \$ 375 \
\mathrm{CF}_{\mathrm{L}} & -\$ 2,200 & \$ 725 & \$ 725 & \$ 725 & \$ 725
\end{array}$

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 8

Worthington Inc.is considering a project that has the following cash flow data.What is the project's payback? $\begin{array}{lcccc}
\text { Year } & 0 & 1 & 2 & 3 \
\text { Cash flows } & -\$ 500 & \$ 150 & \$ 200 & \$ 300
\end{array}$

Accepted Answer

A)  2.03 years 
B)  2.25 years 
C)  2.50 years 
D)  2.75 years 
E)  3.03 years 
A)  2.03 years 
B)  2.25 years 
C)  2.50 years 
D)  2.75 years 
E)  3.03 years

Question 9

Nichols Inc.is considering a project that has the following cash flow data.What is the project's IRR? Note that a project's IRR can be less than the WACC or negative,in both cases it will be rejected. $\begin{array}{lcccccc}
\text { Year } & 0 & 1 & 2 & 3 & 4 & 5 \
 \text { Cash flows } & -\$ 1,250 & \$ 325 & \$ 325 & \$ 325 & \$ 325 & \$ 325
\end{array}$

Accepted Answer

A)  9.43% 
B)  9.91% 
C)  10.40% 
D)  10.92% 
E)  11.47% 
A)  9.43% 
B)  9.91% 
C)  10.40% 
D)  10.92% 
E)  11.47%

Question 10

Shannon Co.is considering a project that has the following cash flow and WACC data.What is the project's discounted payback? $\begin{array}{lccccc}
\text { WACC: } & 10.00 \% & & & \
\text { Year } & 0 & 1 & 2 & 3 & 4 \
\text { Cash flows } & -\$ 950 & \$ 525 & \$ 485 & \$ 445 & \$ 405
\end{array}$

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 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

Poder Inc.is considering a project that has the following cash flow data.What is the project's payback? $\begin{array}{lcccc}
\text { Year } & 0 & 1 & 2 & 3 \
\cline { 2 - 5 } \text { Cash flows } & -\$ 750 & \$ 300 & \$ 325 & \$ 350
\end{array}$

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 13

Projects S and L are both normal projects with an initial cost of $10,000,followed by a series of positive cash inflows.Project S's undiscounted net cash flows total $20,000,while L's total undiscounted flows are $30,000.At a WACC of 10%,the two projects have identical NPVs.Which project's NPV is more sensitive to changes in the WACC?

Accepted Answer

A)  Project L. 
B)  Both projects are equally sensitive to changes in the WACC since their NPVs are equal at all costs of capital. 
C)  Neither project is sensitive to changes in the discount rate, since both have NPV profiles that are horizontal. 
D)  The solution cannot be determined because the problem gives us no information that can be used to determine the projects' relative IRRs. 
E)  Project S. 
A)  Project L. 
B)  Both projects are equally sensitive to changes in the WACC since their NPVs are equal at all costs of capital. 
C)  Neither project is sensitive to changes in the discount rate, since both have NPV profiles that are horizontal. 
D)  The solution cannot be determined because the problem gives us no information that can be used to determine the projects' relative IRRs. 
E)  Project S.

Question 14

Yoga Center Inc.is considering a project that has the following cash flow and WACC data.What is the project's NPV? Note that a project's expected NPV can be negative,in which case it will be rejected. $\begin{array}{lccccc}
\text { WACC: } & 14.00 \% & & & \
\text { Year } & 0 & 1 & 2 & 3 & 4 \
 \text { Cash flows } & -\$ 1,200 & \$ 400 & \$ 425 & \$ 450 & \$ 475
\end{array}$

Accepted Answer

A)  $41.25 
B)  $45.84 
C)  $50.93 
D)  $56.59 
E)  $62.88 
A)  $41.25 
B)  $45.84 
C)  $50.93 
D)  $56.59 
E)  $62.88

Question 15

Spence Company is considering a project that has the following cash flow data.What is the project's IRR? Note that a project's IRR can be less than the WACC or negative,in both cases it will be rejected. $\begin{array}{lcccc}
\text { Year } & 0 & 1 & 2 & 3&4 \
\hline\text { Cash flows } & -\$ 1.050 & \$ 400 & \$ 400 & \$ 400& \$ 400
\end{array}$

Accepted Answer

A)  14.05% 
B)  15.61% 
C)  17.34% 
D)  19.27% 
E)  21.20% 
A)  14.05% 
B)  15.61% 
C)  17.34% 
D)  19.27% 
E)  21.20%

Question 16

A basic rule in capital budgeting is that if a project's NPV exceeds its IRR,then the project should be accepted.

Accepted Answer

A) True 
 B)False

Question 17

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 less than its regular IRR. 
B)  If a project's IRR is greater than its WACC, then the MIRR will be less than the IRR. 
C)  If a project's IRR is greater than its WACC, then the MIRR will be greater than the IRR. 
D)  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. 
E)  A project's MIRR is always greater than its regular IRR. 
A)  A project's MIRR is always less than its regular IRR. 
B)  If a project's IRR is greater than its WACC, then the MIRR will be less than the IRR. 
C)  If a project's IRR is greater than its WACC, then the MIRR will be greater than the IRR. 
D)  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. 
E)  A project's MIRR is always greater than its regular IRR.

Question 18

Conflicts between two mutually exclusive projects occasionally occur,where the NPV method ranks one project higher but the IRR method ranks the other one first.In theory,such conflicts should be resolved in favor of the project with the higher positive IRR.

Accepted Answer

A) True 
 B)False

Question 19

Projects S and L,whose cash flows are shown below,are mutually exclusive,equally risky,and not repeatable.Hooper Inc.is considering which of these two projects to undertake.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. $\begin{array}{lccccc}
\text { WACC: } & 10.25 \% & & & & \
\text { Year } & 0 & 1 & 2 & 3 & 4 \
\mathrm{CF}_{\mathrm{S}} & -\$ 2,050 & \$ 750 & \$ 760 & \$ 770 & \$ 780 \
\mathrm{CF}_{\mathrm{L}} & -\$ 4,300 & \$ 1,500 & \$ 1,518 & \$ 1,536 & \$ 1,554
\end{array}$

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 20

Murray 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 wants to use the IRR criterion,while the CFO favors the NPV method.You were hired to advise Murray on the best procedure.If the wrong decision criterion is used,how much potential value would Murray lose? $\begin{array}{lccccc}
\text { WACC: } & 6.00 \% & & & \
\text { Year } & 0 & 1 & 2 & 3 & 4 \
\mathrm{CF}_{\mathrm{S}} & -\$ 1,025 & \$ 380 & \$ 380 & \$ 380 & \$ 380 \
\mathrm{CF}_{\mathrm{L}} & -\$ 2,150 & \$ 765 & \$ 765 & \$ 765 & \$ 765
\end{array}$

Accepted Answer

A)  $188.68 
B)  $198.61 
C)  $209.07 
D)  $219.52 
E)  $230.49 
A)  $188.68 
B)  $198.61 
C)  $209.07 
D)  $219.52 
E)  $230.49

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

Which of the following statements is CORRECT?

Dickson Co.is considering a project that has the following cash flow and WACC data.What is the project's NPV? Note that a project's expected NPV can be negative,in which case it will be rejected. YACC: 12.00\% Year 0 1 2 3 4 5 Cash flows -\ 1,100 \ 400 \ 390 \ 380 \ 370 \ 360

Reed 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 expected NPV can be negative,in which case it will be rejected. WACC: 10.00\% Year 0 1 2 3 Cash flows -\ 1.050 \ 450 \ 460 \ 470

Which of the following statements is NOT a disadvantage of the regular payback method?

When considering two mutually exclusive projects,the firm should always select the project whose internal rate of return is the highest,provided the projects have the same initial cost.This statement is true regardless of whether the projects can be repeated or not.

Worthington Inc.is considering a project that has the following cash flow data.What is the project's payback? Year 0 1 2 3 Cash flows -\ 500 \ 150 \ 200 \ 300

Nichols Inc.is considering a project that has the following cash flow data.What is the project's IRR? Note that a project's IRR can be less than the WACC or negative,in both cases it will be rejected. Year 0 1 2 3 4 5 Cash flows -\ 1,250 \ 325 \ 325 \ 325 \ 325 \ 325

Shannon Co.is considering a project that has the following cash flow and WACC data.What is the project's discounted payback? WACC: 10.00\% Year 0 1 2 3 4 Cash flows -\ 950 \ 525 \ 485 \ 445 \ 405

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.

Poder Inc.is considering a project that has the following cash flow data.What is the project's payback? Year 0 1 2 3 \cline 2-5 Cash flows -\ 750 \ 300 \ 325 \ 350

Yoga Center Inc.is considering a project that has the following cash flow and WACC data.What is the project's NPV? Note that a project's expected NPV can be negative,in which case it will be rejected. WACC: 14.00\% Year 0 1 2 3 4 Cash flows -\ 1,200 \ 400 \ 425 \ 450 \ 475

Spence Company is considering a project that has the following cash flow data.What is the project's IRR? Note that a project's IRR can be less than the WACC or negative,in both cases it will be rejected. Year 0 1 2 3 4 Cash flows -\ 1.050 \ 400 \ 400 \ 400 \ 400

A basic rule in capital budgeting is that if a project's NPV exceeds its IRR,then the project should be accepted.

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 ranks the other one first.In theory,such conflicts should be resolved in favor of the project with the higher positive IRR.

An Overview of Financial Management and the Financial Environment

Financial Statements, cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Bonds, bond Valuation, and Interest Rates

Risk and Return

Valuation of Stocks and Corporations

Financial Options and Applications in Corporate Finance

The Cost of Capital

Cash Flow Estimation and Risk Analysis

Corporate Valuation and Financial Planning

Agency Conflicts and Corporate Governance

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Supply Chains and Working Capital Management

Multinational Financial Management

Public and Private Financing: Initial Offerings, seasoned Offerings, and Investment Banks

Extension 18 A: Rights Offerings

Lease Financing

Hybrid Financing: Preferred Stock, warrants, and Convertibles

Dynamic Capital Structures

Mergers and Corporate Control

Enterprise Risk Management

Bankruptcy, reorganization, and Liquidation

Portfolio Theory and Asset Pricing Models

Real Options

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Pension Plan Management

Financial Management in Not For Profit Businesses

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