Question 1

Computer Consultants Inc.is considering a project that has the following cash flow and WACC data.What is the project's MIRR? Note that a project's MIRR can be less than the WACC (and even negative),in which case it will be rejected.

Accepted Answer

A) 9.32% 
B) 10.35% 
C) 11.50% 
D) 12.78% 
E) 14.20%

Question 2

Ellmann 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 3

Hart 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 4

Which of the following statements is CORRECT?

Accepted Answer

A) The IRR method can never be subject to the multiple IRR problem, while the MIRR method can be. 
B) One reason some people prefer the MIRR to the regular IRR is that the MIRR is based on a generally more reasonable reinvestment rate assumption. 
C) The higher the WACC, the shorter the discounted payback period. 
D) The MIRR method assumes that cash flows are reinvested at the crossover rate. 
E) The MIRR and NPV decision criteria can never conflict.

Question 5

You 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 6

Yoga Center Inc.is considering a project that has the following cash flow and WACC data.What is the project's NPV? Note that a project's expected NPV can be negative,in which case it will be rejected.

Accepted Answer

A) $41.25 
B) $45.84 
C) $50.93 
D) $56.59 
E) $62.88

Question 7

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 8

Patterson Co.is considering a project that has the following cash flow and WACC data.What is the project's NPV? Note that a project's expected NPV can be negative,in which case it will be rejected.

Accepted Answer

A) $54.62 
B) $57.49 
C) $60.52 
D) $63.54 
E) $66.72

Question 9

Suzanne's Cleaners 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 10

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 11

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

Accepted Answer

A) 14.05% 
B) 15.61% 
C) 17.34% 
D) 19.27% 
E) 21.20%

Question 12

Reed Enterprises is considering a project that has the following cash flow and WACC data.What is the project's NPV? Note that a project's expected NPV can be negative,in which case it will be rejected.

Accepted Answer

A) $92.37 
B) $96.99 
C) $101.84 
D) $106.93 
E) $112.28

Question 13

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 14

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 WACC (and even negative),in which case it will be rejected.

Accepted Answer

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

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

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.

Question 17

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 18

Clifford Company is choosing between two projects.The larger project has an initial cost of $100,000,annual cash flows of $30,000 for 5 years,and an IRR of 15.24%.The smaller project has an initial cost of $50,000,annual cash flows of $16,000 for 5 years,and an IRR of 16.63%.The projects are equally risky.Which of the following statements is CORRECT?

Accepted Answer

A) Since the smaller project has the higher IRR, the two projects' NPV profiles will cross, and the larger project will look better based on the NPV at all positive values of WACC. 
B) If the company uses the NPV method, it will tend to favor smaller, shorter-term projects over larger, longer-term projects, regardless of how high or low the WACC is. 
C) Since the smaller project has the higher IRR but the larger project has the higher NPV at a zero discount rate, the two projects' NPV profiles will cross, and the larger project will have the higher NPV if the WACC is less than the crossover rate. 
D) Since the smaller project has the higher IRR and the larger NPV at a zero discount rate, the two projects' NPV profiles will cross, and the smaller project will look better if the WACC is less than the crossover rate. 
E) Since the smaller project has the higher IRR, the two projects' NPV profiles cannot cross, and the smaller project's NPV will be higher at all positive values of WACC.

Question 19

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) A project's regular IRR is found by compounding the cash inflows at the WACC to find the present value (PV), then discounting the TV to find the IRR. 
B) If a project's IRR is smaller than the WACC, then its NPV will be positive. 
C) A project's IRR is the discount rate that causes the PV of the inflows to equal the project's cost. 
D) If a project's IRR is positive, then its NPV must also be positive. 
E) A project's regular IRR is found by compounding the initial cost at the WACC to find the terminal value (TV), then discounting the TV at the WACC.

Question 20

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.

Exam 12: Capital Budgeting: Decision Rules

Computer Consultants Inc.is considering a project that has the following cash flow and WACC data.What is the project's MIRR? Note that a project's MIRR can be less than the WACC (and even negative) ,in which case it will be rejected.

Ellmann 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.

Hart 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.

Which of the following statements is CORRECT?

You 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.

Yoga Center Inc.is considering a project that has the following cash flow and WACC data.What is the project's NPV? Note that a project's expected NPV can be negative,in which case it will 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.

Patterson Co.is considering a project that has the following cash flow and WACC data.What is the project's NPV? Note that a project's expected NPV can be negative,in which case it will be rejected.

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

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.

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

Reed Enterprises is considering a project that has the following cash flow and WACC data.What is the project's NPV? Note that a project's expected NPV can be negative,in which case it will be rejected.

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.

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 WACC (and even negative) ,in which case it will be rejected.

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

Which of the following statements is CORRECT?

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

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? Assume that the project being considered has normal cash flows,with one outflow followed by a series of inflows.