Question 1

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 2

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.

Question 3

The phenomenon called "multiple internal rates of return" arises when two or more mutually exclusive projects that have different lives are being compared.

Accepted Answer

A) True 
 B)False

Question 4

Barry Company 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) $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

Question 5

The primary reason that the NPV method is conceptually superior to the IRR method for evaluating mutually exclusive investments is that multiple IRRs may exist,and when that happens,we don't know which IRR is relevant.

Accepted Answer

A) True 
 B)False

Question 6

Project X's IRR is 19% and Project Y's IRR is 17%.The projects have the same risk and the same lives,and each has constant cash flows during each year of their lives.If the WACC is 10%,Project Y has a higher NPV than X.Given this information,which of the following statements is CORRECT?

Accepted Answer

A) The crossover rate must be less than 10%. 
B) The crossover rate must be greater than 10%. 
C) If the WACC is 8%, Project X will have the higher NPV. 
D) If the WACC is 18%, Project Y will have the higher NPV. 
E) Project X is larger in the sense that it has the higher initial cost. 
A) The crossover rate must be less than 10%. 
B) The crossover rate must be greater than 10%. 
C) If the WACC is 8%, Project X will have the higher NPV. 
D) If the WACC is 18%, Project Y will have the higher NPV. 
E) Project X is larger in the sense that it has the higher initial cost.

Question 7

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 8

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

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

Which of the following statements is CORRECT?

The phenomenon called "multiple internal rates of return" arises when two or more mutually exclusive projects that have different lives are being compared.

Barry Company 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 primary reason that the NPV method is conceptually superior to the IRR method for evaluating mutually exclusive investments is that multiple IRRs may exist,and when that happens,we don't know which IRR is relevant.

Project X's IRR is 19% and Project Y's IRR is 17%.The projects have the same risk and the same lives,and each has constant cash flows during each year of their lives.If the WACC is 10%,Project Y has a higher NPV than X.Given this information,which of the following statements is CORRECT?

Which of the following statements is CORRECT?

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

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

Continuous Compounding and Discounting

Zero Coupon Bonds

Bankruptcy and Reorganization

Calculating Beta Coefficients

Using the Capm to Estimate the Risk-Adjusted Cost of Capital

Techniques for Measuring Beta Risk

Degree of Leverage

Filters

Exam 11: The Basics of Capital Budgeting

Which of the following statements is CORRECT?

The phenomenon called "multiple internal rates of return" arises when two or more mutually exclusive projects that have different lives are being compared.

Barry Company 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 primary reason that the NPV method is conceptually superior to the IRR method for evaluating mutually exclusive investments is that multiple IRRs may exist,and when that happens,we don't know which IRR is relevant.

Project X's IRR is 19% and Project Y's IRR is 17%.The projects have the same risk and the same lives,and each has constant cash flows during each year of their lives.If the WACC is 10%,Project Y has a higher NPV than X.Given this information,which of the following statements is CORRECT?

Which of the following statements is CORRECT?

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

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

Continuous Compounding and Discounting

Zero Coupon Bonds

Bankruptcy and Reorganization

Calculating Beta Coefficients

Using the Capm to Estimate the Risk-Adjusted Cost of Capital

Techniques for Measuring Beta Risk

Degree of Leverage

Filters