Question 1

Which of the following statements is CORRECT?

Accepted Answer

A)  one defect of the irr method is that it does not take account of the time value of money. 
B)  one defect of the irr method is that it does not take account of the cost of capital. 
C)  one defect of the irr method is that it values a dollar received today the same as a dollar that will not be received until sometime in the future. 
D)  one defect of the irr method is that it assumes that the cash flows to be received from a project can be reinvested at the irr itself, and that assumption is often not valid. 
E)  one defect of the irr method is that it does not take account of cash flows over a project's full life. 
A)  one defect of the irr method is that it does not take account of the time value of money. 
B)  one defect of the irr method is that it does not take account of the cost of capital. 
C)  one defect of the irr method is that it values a dollar received today the same as a dollar that will not be received until sometime in the future. 
D)  one defect of the irr method is that it assumes that the cash flows to be received from a project can be reinvested at the irr itself, and that assumption is often not valid. 
E)  one defect of the irr method is that it does not take account of cash flows over a project's full life.

Question 2

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

Accepted Answer

A)  1.86 years 
B)  2.07 years 
C)  2.30 years 
D)  2.53 years 
E)  2.78 years 
A)  1.86 years 
B)  2.07 years 
C)  2.30 years 
D)  2.53 years 
E)  2.78 years

Question 3

Which of the following statements is CORRECT?Assume that the project being considered has normal cash flows, with one cash outflow at t = 0 followed by a series of positive cash flows.

Accepted Answer

A)  a project's mirr is always less than its regular irr. 
B)  if a project's irr is greater than its cost of capital, then its mirr will be greater than the irr. 
C)  to find a project's mirr, we compound cash inflows at the regular irr and then find the discount rate that causes the pv of the terminal value to equal the initial cost. 
D)  to find a project's mirr, the textbook procedure compounds cash inflows at the cost of capital and then finds the discount rate that causes the pv of the terminal value to equal the initial cost. 
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 cost of capital, then its mirr will be greater than the irr. 
C)  to find a project's mirr, we compound cash inflows at the regular irr and then find the discount rate that causes the pv of the terminal value to equal the initial cost. 
D)  to find a project's mirr, the textbook procedure compounds cash inflows at the cost of capital and then finds the discount rate that causes the pv of the terminal value to equal the initial cost. 
E)  a project's mirr is always greater than its regular irr.

Question 4

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. $\begin{array}{cccccr}
r& 7.50 \% & & & \
\text { Year } & 0 & 1 & 2 & 3 & 4 \
\mathrm{CF}_{\mathrm{S}} & -\$ 1,100 & \$ 550 & \$ 600 & \$ 100 & \$ 100 \
\mathrm{CF}_{\mathrm{L}} & -\$ 2,700 & \$ 650 & \$ 725 & \$ 800 & \$ 1,400
\end{array}$

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 5

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 cost of capital, 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 cost of capital, 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 cost of capital, 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 cost of capital, while the irr method assumes reinvestment at the irr.

Question 6

Wiley's Wire Products 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. $\begin{array}{lcccc}
&r=11.00 \%\
\text { Year } & 0 & 1 & 2 & 3 \
 \text { Cash flows } & -\$ 800 & \$ 350 & \$ 350 & \$ 350
\end{array}$

Accepted Answer

A)  8.86% 
B)  9.84% 
C)  10.94% 
D)  12.15% 
E)  13.50% 
A)  8.86% 
B)  9.84% 
C)  10.94% 
D)  12.15% 
E)  13.50%

Question 7

Craig's Car Wash Inc. is considering a project that has the following cash flow and cost of capital (r) data. What is the project's discounted payback? $\begin{array}{lcccc}
&r=10.00 \%\
\text { Year } & 0 & 1 & 2 & 3 \
 \text { Cash flows } & -\$ 900 & \$ 500 & \$ 500 & \$ 500
\end{array}$

Accepted Answer

A)  1.88 years 
B)  2.09 years 
C)  2.29 years 
D)  2.52 years 
E)  2.78 years 
A)  1.88 years 
B)  2.09 years 
C)  2.29 years 
D)  2.52 years 
E)  2.78 years

Question 8

The NPV method's assumption that cash inflows are reinvested at the cost of capital is generally more reasonable than the IRR's assumption that cash flows are reinvested at the IRR. This is an important reason why the NPV method is generally preferred over the IRR method.

Accepted Answer

A) True 
 B)False

Which of the following statements is CORRECT?

McGlothin 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 -\ 1,150 \ 500 \ 500 \ 500

Which of the following statements is CORRECT?Assume that the project being considered has normal cash flows, with one cash outflow at t = 0 followed by a series of positive cash flows.

Which of the following statements is CORRECT?

Craig's Car Wash Inc. 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 Cash flows -\ 900 \ 500 \ 500 \ 500

The NPV method's assumption that cash inflows are reinvested at the cost of capital is generally more reasonable than the IRR's assumption that cash flows are reinvested at the IRR. This is an important reason why the NPV method is generally preferred over the IRR method.

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

Filters

Exam 12: Capital Budgeting: Decision Criteria

Which of the following statements is CORRECT?

McGlothin 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 -\ 1,150 \ 500 \ 500 \ 500

Which of the following statements is CORRECT?Assume that the project being considered has normal cash flows, with one cash outflow at t = 0 followed by a series of positive cash flows.

Which of the following statements is CORRECT?

Craig's Car Wash Inc. 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 Cash flows -\ 900 \ 500 \ 500 \ 500

The NPV method's assumption that cash inflows are reinvested at the cost of capital is generally more reasonable than the IRR's assumption that cash flows are reinvested at the IRR. This is an important reason why the NPV method is generally preferred over the IRR method.

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

Filters