Question 1

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

Accepted Answer

A) 	1.91 years 
B) 	2.12 years 
C) 	2.36 years 
D) 	2.59 years 
E) 	2.85 years

Question 2

Projects C and D are mutually exclusive and have normal cash flows.
Project 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 probably has a higher IRR. 
B)  Project D is probably larger in scale than Project C. 
C)  Project C probably has a faster payback. 
D)  Project C probably has a higher IRR. 
E)  The crossover rate between the two projects is below 12%.

Question 3

Moerdyk & Co. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the higher IRR, how much value will be forgone? Note that under certain conditions choosing projects on the basis of the IRR will not cause any value to be lost because the project with the higher IRR will also have the higher NPV, i.e., no conflict will exist.

Accepted Answer

A)  $5.47 
B)  $6.02 
C)  $6.62 
D)  $7.29 
E)  $7.82

Question 4

Conflicts between two mutually exclusive projects occasionally occur, where the NPV method ranks one project higher but the IRR method ranks the other one first. In theory, such conflicts should be resolved in favor of the project with the higher positive IRR.

Accepted Answer

A) True 
 B)False

Question 5

A 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 6

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

Accepted Answer

A)  2.31 years 
B)  2.56 years 
C)  2.85 years 
D)  3.16 years 
E)  3.52 years

Question 7

Simms Corp. 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 WACC or negative, in both cases it will be rejected.

Accepted Answer

A)  12.55% 
B)  13.21% 
C)  13.87% 
D)  14.56% 
E)  15.29%

Question 8

Thorley Inc. 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 WACC or negative, in both cases it will be rejected.

Accepted Answer

A)  9.43% 
B)  9.91% 
C)  10.40% 
D)  10.92% 
E)  11.47%

Question 9

Anderson Systems is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that if a project's expected NPV is negative, it should be rejected.

Accepted Answer

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

Question 10

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.

Accepted Answer

A) True 
 B)False

Question 11

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 12

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 13

If you were evaluating two mutually exclusive projects for a firm with a zero cost of capital, the payback method and NPV method would always lead to the same decision on which project to undertake.

Accepted Answer

A) True 
 B)False

Question 14

When considering two mutually exclusive projects, the firm should always select the project whose internal rate of return is the highest, provided the projects have the same initial cost. This statement is true regardless of whether the projects can be repeated or not.

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 NPV must be negative. 
B)  If a project's IRR is equal to its WACC, then under all reasonable conditions, the project's IRR must be negative. 
C)  If a project's IRR is equal to its WACC, then under all reasonable conditions the project's NPV must be zero. 
D)  There is no necessary relationship between a project's IRR, its WACC, and its NPV. 
E)  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.

Question 16

A 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 17

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 18

One advantage of the payback method for evaluating potential investments is that it provides information about a project's liquidity and risk.

Accepted Answer

A) True 
 B)False

Question 19

Yonan Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the shorter payback, some value may be forgone. How much value will be lost in this instance? Note that under some conditions choosing projects on the basis of the shorter payback will not cause value to be lost.

Accepted Answer

A)  $24.14 
B)  $26.82 
C)  $29.80 
D)  $33.11 
E)  $36.42

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 10: The Basics of Capital Budgeting

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

Projects C and D are mutually exclusive and have normal cash flows. Project 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?

Conflicts between two mutually exclusive projects occasionally occur, where the NPV method ranks one project higher but the IRR method ranks the other one first. In theory, such conflicts should be resolved in favor of the project with the higher positive IRR.

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

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

Simms Corp. 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 WACC or negative, in both cases it will be rejected.

Thorley Inc. 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 WACC or negative, in both cases it will be rejected.

Anderson Systems is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that if a project's expected NPV is negative, it should be rejected.

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.

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.

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.

If you were evaluating two mutually exclusive projects for a firm with a zero cost of capital, the payback method and NPV method would always lead to the same decision on which project to undertake.

When considering two mutually exclusive projects, the firm should always select the project whose internal rate of return is the highest, provided the projects have the same initial cost. This statement is true regardless of whether the projects can be repeated or not.

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

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

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.

One advantage of the payback method for evaluating potential investments is that it provides information about a project's liquidity and risk.

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