Question 1

a project with one initial cash outflow followed by a series of positive cash inflows, the modified IRR (MIRR) method involves compounding the cash inflows out to the end of the project's life, summing those compounded cash flows to form a terminal value (TV), and then finding the discount rate that causes the PV of the TV to equal the project's cost.

Accepted Answer

A) True 
 B)False

Question 2

are considering two mutually exclusive, equally risky, projects Both have IRRs that exceed the WACC Which of the following statements is CORRECT? Assume that the projects have normal cash flows, with one outflow followed by a series of inflows.

Accepted Answer

A)  If the cost of capital is greater than the crossover rate, then the IRR and the NPV criteria will not result in a conflict between the projects. The same project will rank higher by both criteria. 
B)  If the cost of capital is less than the crossover rate, then the IRR and the NPV criteria will not result in a conflict between the projects. The same project will rank higher by both criteria. 
C)  For a conflict to exist between NPV and IRR, the initial investment cost of one project must exceed the cost of the other. 
D)  For a conflict to exist between NPV and IRR, one project must have an increasing stream of cash flows over time while the other has a decreasing stream. If both sets of cash flows are increasing or decreasing, then it would be impossible for a conflict to exist, even if one project is larger than the other. 
E)  If the two projects' NPV profiles do not cross, then there will be a sharp conflict as to which one should be selected.

Question 3

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)  One drawback of the regular payback for evaluating projects is that this method does not properly account for the time value of money. 
B)  If a project's payback is positive, then the project should be rejected because it must have a negative NPV. 
C)  The regular payback ignores cash flows beyond the payback period, but the discounted payback method overcomes this problem. 
D)  If a company uses the same payback requirement to evaluate all projects, say it requires a payback of 4 years or less, then the company will tend to reject projects with relatively short lives and accept long-lived projects, and this will cause its risk to increase over time. 
E)  The longer a project's payback period, the more desirable the project is normally considered to be by this criterion.

Question 4

Lancaster Corpis considering two equally risky, mutually exclusive projects, both of which have normal cash flows Project A has an IRR of 11%, while Project B's IRR is 14% When the WACC is 8%, the projects have the same NPV Given this information, which of the following statements is CORRECT?

Accepted Answer

A)  If the WACC is 9%, Project A's NPV will be higher than Project B's. 
B)  If the WACC is 6%, Project B's NPV will be higher than Project A's. 
C)  If the WACC is greater than 14%, Project A's IRR will exceed Project B's. 
D)  If the WACC is 9%, Project B's NPV will be higher than Project A's. 
E)  If the WACC is 13%, Project A's NPV will be higher than Project B's.

Question 5

Because "present value" refers to the value of cash flows that occur at different points in time, a series of present values of cash flows should not be summed to determine the value of a capital budgeting project.

Accepted Answer

A) True 
 B)False

Question 6

Consider two projects, X and YProject 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 greater than 10%. 
B)  If the WACC is 8%, Project X will have the higher NPV. 
C)  If the WACC 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 7

Normal Projects S and L have the same NPV when the discount rate is zero However, Project S's cash flows come in faster than those of L Therefore, we know that at any discount rate greater than zero, L will have the higher NPV.

Accepted Answer

A) True 
 B)False

Question 8

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 lower the WACC used to calculate a project's NPV, the lower the calculated NPV will be. 
B)  If a project's NPV is less than zero, then its IRR must be less than the WACC. 
C)  If a project's NPV is greater than zero, then its IRR must be less than zero. 
D)  The NPV of a relatively low-risk project should be found using a relatively high WACC. 
E)  A project's NPV is found by compounding the cash inflows at the IRR to find the terminal value (TV), then discounting the TV at the WACC.

Question 9

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.

Question 10

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 11

IRR of normal Project X is greater than the IRR of normal Project Y, and both IRRs are greater than zero Also, the NPV of X is greater than the NPV of Y at the cost of capital If the two projects are mutually exclusive, Project X should definitely be selected, and the investment made, provided we have confidence in the data Put another way, it is impossible to draw NPV profiles that would suggest not accepting Project X.

Accepted Answer

A) True 
 B)False

Question 12

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 WACC 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 WACC. 
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 WACCs. 
E)  A project's NPV is generally found by compounding the cash inflows at the WACC to find the terminal value (TV), then discounting the TV at the IRR to find its PV.

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

basic rule in capital budgeting is that If a project's NPV exceeds its IRR, then the project should be accepted.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following statements is CORRECT? Assume that all projects being considered have normal cash flows and are equally risky.

Accepted Answer

A)  If a project's IRR is equal to its WACC, then under all reasonable conditions, the project's IRR must be negative. 
B)  If a project's IRR is equal to its WACC, then under all reasonable conditions the project's NPV must be zero. 
C)  There is no necessary relationship between a project's IRR, its WACC, and its NPV. 
D)  When evaluating mutually exclusive projects, those projects with relatively long lives will tend to have relatively high NPVs when the cost of capital is relatively high. 
E)  If a project's IRR is equal to its WACC, then, under all reasonable conditions, the project's NPV must be negative.

Question 16

Projects C and D both have normal cash flows and are mutually exclusiveProject C has a higher NPV if the WACC is less than 12%, whereas Project D has a higher NPV if the WACC 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.

Question 17

Martin Manufacturing is considering two normal, equally risky, mutually exclusive, but not repeatable projectsMartin's WACC is 10%The two projects have the same investment costs, but Project A has an IRR of 15%, while Project B has an IRR of 20% Assuming the projects' NPV profiles cross in the upper right quadrant, which of the following statements is CORRECT?

Accepted Answer

A)  Since the projects are mutually exclusive, the firm should always select Project B. 
B)  If the crossover rate is 8%, Project B will have the higher NPV. 
C)  Only one project has a positive NPV. 
D)  If the crossover rate is 8%, Project A will have the higher NPV. 
E)  Each project must have a negative NPV.

Question 18

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

Question 19

Which of the following statements is CORRECT?

Accepted Answer

A)  If a project has "normal" cash flows, then its MIRR must be positive. 
B)  If a project has "normal" cash flows, then it will have exactly two real IRRs. 
C)  The definition of "normal" cash flows is that the cash flow stream has one or more negative cash flows followed by a stream of positive cash flows and then one negative cash flow at the end of the project's life. 
D)  If a project has "normal" cash flows, then it can have only one real IRR, whereas a project with "nonnormal" cash flows might have more than one real IRR. 
E)  If a project has "normal" cash flows, then its IRR must be positive.

Question 20

Which of the following statements is CORRECT?

Accepted Answer

A)  One defect of the IRR method versus the NPV is that the IRR does not take account of the time value of money. 
B)  One defect of the IRR method versus the NPV is that the IRR does not take account of the cost of capital. 
C)  One defect of the IRR method versus the NPV is that the IRR 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 versus the NPV is that the IRR does not take proper account of differences in the sizes of projects. 
E)  One defect of the IRR method versus the NPV is that the IRR does not take account of cash flows over a project's full life.

Exam 12: Capital Budgeting

are considering two mutually exclusive, equally risky, projects Both have IRRs that exceed the WACC Which of the following statements is CORRECT? Assume that the projects have normal cash flows, with one outflow followed by a series of inflows.

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.

Lancaster Corpis considering two equally risky, mutually exclusive projects, both of which have normal cash flows Project A has an IRR of 11%, while Project B's IRR is 14% When the WACC is 8%, the projects have the same NPV Given this information, which of the following statements is CORRECT?

Because "present value" refers to the value of cash flows that occur at different points in time, a series of present values of cash flows should not be summed to determine the value of a capital budgeting project.

Normal Projects S and L have the same NPV when the discount rate is zero However, Project S's cash flows come in faster than those of L Therefore, we know that at any discount rate greater than zero, L will have the higher NPV.

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?

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.

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.

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

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.

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

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

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?