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.

Question 2

Current Design Co.is considering two mutually exclusive,equally risky,and not repeatable projects,S and L.Their cash flows are shown below.The CEO believes the IRR is the best selection criterion,while the CFO advocates the NPV.If the decision is made by choosing the project with the higher IRR rather than the one with the higher NPV,how much,if any,value will be forgone,i.e.,what's the chosen NPV versus the maximum possible NPV? Note that (1)"true value" is measured by NPV,and (2)under some conditions the choice of IRR vs.NPV will have no effect on the value gained or lost.

Accepted Answer

A) $138.10 
B) $149.21 
C) $160.31 
D) $171.42 
E) $182.52 
A) $138.10 
B) $149.21 
C) $160.31 
D) $171.42 
E) $182.52

Question 3

An increase in the firm's WACC will decrease projects' NPVs,which could change the accept/reject decision for any potential project.However,such a change would have no impact on projects' IRRs.Therefore,the accept/reject decision under the IRR method is independent of the cost of capital.

Accepted Answer

A) True 
 B)False

Question 4

Projects A and B have identical expected lives and identical initial cash outflows (costs).However,most of one project's cash flows come in the early years,while most of the other project's cash flows occur in the later years.The two NPV profiles are given below:   Which of the following statements is CORRECT?

Accepted Answer

A) More of Project B's cash flows occur in the later years. 
B) We must have information on the cost of capital in order to determine which project has the larger early cash flows. 
C) The NPV profile graph is inconsistent with the statement made in the problem. 
D) The crossover rate, i.e., the rate at which Projects A and B have the same NPV, is greater than either project's IRR. 
E) More of Project A's cash flows occur in the later years. 
A) More of Project B's cash flows occur in the later years. 
B) We must have information on the cost of capital in order to determine which project has the larger early cash flows. 
C) The NPV profile graph is inconsistent with the statement made in the problem. 
D) The crossover rate, i.e., the rate at which Projects A and B have the same NPV, is greater than either project's IRR. 
E) More of Project A's cash flows occur in the later years.

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

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 7

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

Which of the following statements is CORRECT?

An increase in the firm's WACC will decrease projects' NPVs,which could change the accept/reject decision for any potential project.However,such a change would have no impact on projects' IRRs.Therefore,the accept/reject decision under the IRR method is independent of the cost of capital.

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

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.

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

An Overview of Financial Management and the Financial Environment

Risk and Return: Part I

Risk and Return: Part Ii

Bond Valuation

Financial Options

Accounting for Financial Management

Analysis of Financial Statements

Basic Stock Valuation

Corporate Valuation and Financial Planning

Corporate Governance

Determining the Cost of Capital

Cash Flow Estimation and Risk Analysis

Real Options

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Dynamic Capital Structures and Corporate Valuation

Initial Public Offerings, investment Banking, and Financial Restructuring

Lease Financing

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

Supply Chains and Working Capital Management

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Enterprise Risk Management

Bankruptcy, reorganization, and Liquidation

Mergers and Corporate Control

Multinational Financial Management

Time Value of Money

Basic Financial Tools: a Review

Pension Plan Management

Financial Management in Not-For-Profit Businesses

a Values of the Areas Under the Standard Normal

Filters

Exam 12: Capital Budgeting: Decision Rules

Which of the following statements is CORRECT?

An increase in the firm's WACC will decrease projects' NPVs,which could change the accept/reject decision for any potential project.However,such a change would have no impact on projects' IRRs.Therefore,the accept/reject decision under the IRR method is independent of the cost of capital.

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

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.

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

An Overview of Financial Management and the Financial Environment

Risk and Return: Part I

Risk and Return: Part Ii

Bond Valuation

Financial Options

Accounting for Financial Management

Analysis of Financial Statements

Basic Stock Valuation

Corporate Valuation and Financial Planning

Corporate Governance

Determining the Cost of Capital

Cash Flow Estimation and Risk Analysis

Real Options

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Dynamic Capital Structures and Corporate Valuation

Initial Public Offerings, investment Banking, and Financial Restructuring

Lease Financing

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

Supply Chains and Working Capital Management

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Enterprise Risk Management

Bankruptcy, reorganization, and Liquidation

Mergers and Corporate Control

Multinational Financial Management

Time Value of Money

Basic Financial Tools: a Review

Pension Plan Management

Financial Management in Not-For-Profit Businesses

a Values of the Areas Under the Standard Normal

Filters