Exam 12: Capital Budgeting: Decision Criteria

Last month, Standard Systems analyzed the project whose cash flows are shown below. However, before the decision to accept or reject the project took place, the Federal Reserve changed interest rates and therefore the firm's cost of capital (r). The Fed's action did not affect the forecasted cash flows. By how much did the change in the r affect the project's forecasted NPV? Note that a project's expected NPV can be negative, in which case it should be rejected. Old r: 10.00\% New r: 11.25\% Year 0 1 2 3 Cash flows -\ 1,000 \ 410 \ 410 \ 410

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.

Which of the following statements is CORRECT?

Garner Inc. is considering a project that has the following cash flow data. What is the project's payback? Year 0 1 2 3 Canh tlows -\ 350 200 200 200

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 all projects being considered have normal cash flows and are equally risky.

The NPV method is based on the assumption that projects' cash flows are reinvested at the project's risk-adjusted cost of capital.

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

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

No conflict will exist between the NPV and IRR methods, when used to evaluate two equally risky but mutually exclusive projects, if the projects' cost of capital exceeds the rate at which the projects' NPV profiles cross.

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

Which of the following statements is CORRECT?

Westwood Painting Co. is considering a project that has the following cash flow and cost of capital (r) data. What is the project's MIRR? Note that a project's MIRR can be less than the cost of capital (and even negative), in which case it will be rejected. r=12.25\% Year 0 1 2 3 4 Cash flows -850 300 320 340 360

Assume a project has normal cash flows. All else equal, which of the following statements is CORRECT?

Both the regular and the modified IRR (MIRR) methods have wide appeal to professors, but most business executives prefer the NPV method to either of the IRR methods.

Which of the following statements is CORRECT?

Robbins Inc. is considering a project that has the following cash flow and cost of capital (r) data. What is the project's NPV? Note that if a project's expected NPV is negative, it should be rejected. Year 10.25\% 0 1 2 3 4 5 Cash FlowS -1,000 300 300 300 300 300

Pet World 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 cost of capital (and even negative), in which case it will be rejected. Year 0 1 2 3 4 5 - Cash flows \ 9.500 \ 2.000 \ 2.025 \ 2.050 \ 2.075 \ 2.100

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 cost of capital or negative, in both cases it will be rejected. Year 0 1 2 3 4 Cash flows -\ 1,050 400 400 \ 400 400

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:σσσσWhich of the following statements is CORRECT?