Question 1

Which of the following statements is CORRECT?

Accepted Answer

A)  if two projects are mutually exclusive, then they are likely to have multiple irrs. 
B)  if a project is independent, then it cannot have multiple irrs. 
C)  multiple irrs can occur only if the signs of the cash flows change more than once. 
D)  if a project has two irrs, then the smaller one is the one that is most relevant, and it should be accepted and relied upon. 
E)  for a project to have more than one irr, then both irrs must be greater than the cost of capital. 
A)  if two projects are mutually exclusive, then they are likely to have multiple irrs. 
B)  if a project is independent, then it cannot have multiple irrs. 
C)  multiple irrs can occur only if the signs of the cash flows change more than once. 
D)  if a project has two irrs, then the smaller one is the one that is most relevant, and it should be accepted and relied upon. 
E)  for a project to have more than one irr, then both irrs must be greater than the cost of capital.

Question 2

Projects C and D both have normal cash flows and are mutually exclusive. Project C has a higher NPV if the cost of capital is less than 12%, whereas Project D has a higher NPV if the cost of capital exceeds 12%. Which of the following statements is CORRECT?

Accepted Answer

A)  project d is probably larger in scale than project c. 
B)  project c probably has a faster payback. 
C)  project c probably has a higher irr. 
D)  the crossover rate between the two projects is below 12%. 
E)  project d probably has a higher irr. 
A)  project d is probably larger in scale than project c. 
B)  project c probably has a faster payback. 
C)  project c probably has a higher irr. 
D)  the crossover rate between the two projects is below 12%. 
E)  project d probably has a higher irr.

Question 3

Which of the following statements is CORRECT?

Accepted Answer

A)  the npv profile graph for a normal project will generally have a positive (upward) slope as the life of the project increases. 
B)  an npv profile graph is designed to give decision makers an idea about how a project's risk varies with its life. 
C)  an npv profile graph is designed to give decision makers an idea about how a project's contribution to the firm's value varies with the cost of capital. 
D)  we cannot draw a project's npv profile unless we know the appropriate cost of capital for use in evaluating the project's npv. 
E)  an npv profile graph shows how a project's payback varies as the cost of capital changes. 
A)  the npv profile graph for a normal project will generally have a positive (upward) slope as the life of the project increases. 
B)  an npv profile graph is designed to give decision makers an idea about how a project's risk varies with its life. 
C)  an npv profile graph is designed to give decision makers an idea about how a project's contribution to the firm's value varies with the cost of capital. 
D)  we cannot draw a project's npv profile unless we know the appropriate cost of capital for use in evaluating the project's npv. 
E)  an npv profile graph shows how a project's payback varies as the cost of capital changes.

Question 4

The NPV and IRR methods, when used to evaluate two equally risky but mutually exclusive projects, will lead to different accept/reject decisions and thus capital budgets if the cost of capital at which the projects' NPV profiles cross is less than the projects' cost of capital.

Accepted Answer

A) True 
 B)False

Question 5

When evaluating mutually exclusive projects, the modified IRR (MIRR) always leads to the same capital budgeting decisions as the NPV method, regardless of the relative lives or sizes of the projects being evaluated.

Accepted Answer

A) True 
 B)False

Question 6

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)  the higher the cost of capital used to calculate the npv, the lower the calculated npv will be. 
B)  if a project's npv is greater than zero, then its irr must be less than the cost of capital. 
C)  if a project's npv is greater than zero, then its irr must be less than zero. 
D)  the npvs of relatively risky projects should be found using relatively low costs of capital. 
E)  a project's npv is generally found by compounding the cash inflows at the cost of capital to find the terminal value (tv), then discounting the tv at the irr to find its pv. 
A)  the higher the cost of capital used to calculate the npv, the lower the calculated npv will be. 
B)  if a project's npv is greater than zero, then its irr must be less than the cost of capital. 
C)  if a project's npv is greater than zero, then its irr must be less than zero. 
D)  the npvs of relatively risky projects should be found using relatively low costs of capital. 
E)  a project's npv is generally found by compounding the cash inflows at the cost of capital to find the terminal value (tv), then discounting the tv at the irr to find its pv.

Question 7

Which of the following statements is CORRECT?

Accepted Answer

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

Question 8

Project S has a pattern of high cash flows in its early life, while Project L has a longer life, with large cash flows late in its life. Neither has negative cash flows after Year 0, and at the current cost of capital, the two projects have identical NPVs. Now suppose interest rates and money costs decline. Other things held constant, this change will cause L to become preferred to S.

Accepted Answer

A) True 
 B)False

Question 9

Projects A and B are mutually exclusive and have normal cash flows. Project A has an IRR of 15% and B's IRR is 20%. The company's cost of capital is 12%, and at that rate Project A has the higher NPV. Which of the following statements is CORRECT?

Accepted Answer

A)  assuming the timing pattern of the two projects' cash flows is the same, project b probably has a higher cost (and larger scale). 
B)  assuming the two projects have the same scale, project b probably has a faster payback than project a. 
C)  the crossover rate for the two projects must be 12%. 
D)  since b has the higher irr, then it must also have the higher npv if the crossover rate is less than the cost of capital of 12%. 
E)  the crossover rate for the two projects must be less than 12%. 
A)  assuming the timing pattern of the two projects' cash flows is the same, project b probably has a higher cost (and larger scale). 
B)  assuming the two projects have the same scale, project b probably has a faster payback than project a. 
C)  the crossover rate for the two projects must be 12%. 
D)  since b has the higher irr, then it must also have the higher npv if the crossover rate is less than the cost of capital of 12%. 
E)  the crossover rate for the two projects must be less than 12%.

Question 10

Kiley Electronics 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. $$\begin{array}{l}
\begin{array} { l } 
\text { Year } \
\text { Cash flows }
\end{array}
\begin{array} { c c c c } 
0 & 1 & 2 & 3 \
\hline - \$ 1,100 & \$ 450 & \$ 470 & \$ 490
\end{array}
\end{array}$$

Accepted Answer

A)  9.70% 
B)  10.78% 
C)  11.98% 
D)  13.31% 
E)  14.64% 
A)  9.70% 
B)  10.78% 
C)  11.98% 
D)  13.31% 
E)  14.64%

Question 11

Which of the following statements is CORRECT?

Accepted Answer

A)  the payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects. 
B)  the discounted payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects. 
C)  the net present value method (npv) is generally regarded by academics as being the best single method for evaluating capital budgeting projects. 
D)  the modified internal rate of return method (mirr) is generally regarded by academics as being the best single method for evaluating capital budgeting projects. 
E)  the internal rate of return method (irr) is generally regarded by academics as being the best single method for evaluating capital budgeting projects. 
A)  the payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects. 
B)  the discounted payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects. 
C)  the net present value method (npv) is generally regarded by academics as being the best single method for evaluating capital budgeting projects. 
D)  the modified internal rate of return method (mirr) is generally regarded by academics as being the best single method for evaluating capital budgeting projects. 
E)  the internal rate of return method (irr) is generally regarded by academics as being the best single method for evaluating capital budgeting projects.

Question 12

An increase in the firm's cost of capital 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 13

Ellmann Systems 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. $\begin{array}{lccc}
r& 9.00\%\
\text { Year: } &0& 1 & 2 & 3 \
 \text { FCF: } & -\$ 1000 & \$ 500 & \$ 500& \$ 500
\end{array}$

Accepted Answer

A)  $265.65 
B)  $278.93 
C)  $292.88 
D)  $307.52 
E)  $322.90 
A)  $265.65 
B)  $278.93 
C)  $292.88 
D)  $307.52 
E)  $322.90

Question 14

Shannon Co. is considering a project that has the following cash flow and cost of capital (r) data. What is the project's discounted payback? $\begin{array} { l c c c c c } 
&r=10.00 \%\
\text { Year } &0& 1 & 2 & 3 & 4 \
\text { Cash flows } & - \$ 950 & \$ 525 & 485 & 445 & 405
\end{array}$

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 15

Assuming that their NPVs based on the firm's cost of capital are equal, the NPV of a project whose cash flows accrue relatively rapidly will be more sensitive to changes in the discount rate than the NPV of a project whose cash flows come in later in its life.

Accepted Answer

A) True 
 B)False

Question 16

Consider two projects, X and Y. 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 cost of capital 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 greater than 10%. 
B)  if the cost of capital is 8%, project x will have the higher npv. 
C)  if the cost of capital is 18%, project y will have the higher npv. 
D)  project x is larger in the sense that it has the higher initial cost. 
E)  the crossover rate must be less than 10%. 
A)  the crossover rate must be greater than 10%. 
B)  if the cost of capital is 8%, project x will have the higher npv. 
C)  if the cost of capital is 18%, project y will have the higher npv. 
D)  project x is larger in the sense that it has the higher initial cost. 
E)  the crossover rate must be less than 10%.

Question 17

Scott Enterprises 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. $\begin{array}{lccc}
r& 11.00\%\
\text { Year: } &0& 1 & 2 & 3&4 \
 \text { Cash flows } & -\$ 1000 & \$ 350 & \$  350& \$  350& \$  350
\end{array}$

Accepted Answer

A)  $77.49 
B)  $81.56 
C)  $85.86 
D)  $90.15 
E)  $94.66 
A)  $77.49 
B)  $81.56 
C)  $85.86 
D)  $90.15 
E)  $94.66

Question 18

If the IRR of normal Project X is greater than the IRR of mutually exclusive (and also normal) Project Y, we can conclude that the firm should always select X rather than Y if X has NPV > 0.

Accepted Answer

A) True 
 B)False

Question 19

Reed Enterprises 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. $\begin{array}{lcccc}
r & 10.00 \% \
\text { Year }  & 0 & 1 & 2 & 3 \
 \text { Cash flows }& -\$ 1,050 & \$ 450 & \$ 460 & \$ 470
\end{array}$

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 20

Other things held constant, an increase in the cost of capital will result in a decrease in a project's IRR.

Accepted Answer

A) True 
 B)False

Exam 12: Capital Budgeting: Decision Criteria

Which of the following statements is CORRECT?

Projects C and D both have normal cash flows and are mutually exclusive. Project C has a higher NPV if the cost of capital is less than 12%, whereas Project D has a higher NPV if the cost of capital exceeds 12%. Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

The NPV and IRR methods, when used to evaluate two equally risky but mutually exclusive projects, will lead to different accept/reject decisions and thus capital budgets if the cost of capital at which the projects' NPV profiles cross is less than the projects' cost of capital.

When evaluating mutually exclusive projects, the modified IRR (MIRR) always leads to the same capital budgeting decisions as the NPV method, regardless of the relative lives or sizes of the projects being evaluated.

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?

Projects A and B are mutually exclusive and have normal cash flows. Project A has an IRR of 15% and B's IRR is 20%. The company's cost of capital is 12%, and at that rate Project A has the higher NPV. Which of the following statements is CORRECT?

Kiley Electronics 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 Cash flows 0 1 2 3 -\ 1,100 \ 450 \ 470 \ 490

Which of the following statements is CORRECT?

Ellmann Systems 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. r 9.00\% Year: 0 1 2 3 FCF: -\ 1000 \ 500 \ 500 \ 500

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

Assuming that their NPVs based on the firm's cost of capital are equal, the NPV of a project whose cash flows accrue relatively rapidly will be more sensitive to changes in the discount rate than the NPV of a project whose cash flows come in later in its life.

Scott Enterprises 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. r 11.00\% Year: 0 1 2 3 4 Cash flows -\ 1000 \ 350 \ 350 \ 350 \ 350

If the IRR of normal Project X is greater than the IRR of mutually exclusive (and also normal) Project Y, we can conclude that the firm should always select X rather than Y if X has NPV > 0.

Reed Enterprises 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 10.00\% Year 0 1 2 3 Cash flows -\ 1,050 \ 450 \ 460 \ 470

Other things held constant, an increase in the cost of capital will result in a decrease in a project's IRR.

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

Capital Budgeting-Estimating Cash Flows and Analyzing Risk

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

Other Topics in Working Capital Management

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

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