Question 1

A firm is considering Projects S and L,whose cash flows are shown below.These projects are mutually exclusive,equally risky,and not repeatable.The CEO wants to use the IRR criterion,while the CFO favors the NPV method.You were hired to advise the firm on the best procedure.If the wrong decision criterion is used,how much potential value would the firm lose?

Accepted Answer

A)  $188.68
B)  $198.61
C)  $209.07
D)  $219.52
E)  $230.49 C

Question 2

Thorley Inc.is considering a project that has the following cash flow data.What is the project's IRR? Note that a project's projected 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% A

Question 3

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  True

Question 4

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

Accepted Answer

A)  13.13%
B)  14.44%
C)  15.89%
D)  17.48%
E)  19.22%

Question 5

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

Question 6

Projects A and B have identical expected lives and identical initial cash outflows (costs).However,most of one project's cash flows come in the early years,while most of the other project's cash flows occur in the later years.The two NPV profiles are given below:
​
 ​
Which of the following statements is CORRECT?

Accepted Answer

A)  More of Project A's cash flows occur in the later years.
B)  More of Project B's cash flows occur in the later years.
C)  We must have information on the cost of capital in order to determine which project has the larger early cash flows.
D)  The NPV profile graph is inconsistent with the statement made in the problem.
E)  The crossover rate, i.e., the rate at which Projects A and B have the same NPV, is greater than either project's IRR.

Question 7

Noe Drilling Inc.is considering Projects S and L,whose cash flows are shown below.These projects are mutually exclusive,equally risky,and not repeatable.The CEO believes the IRR is the best selection criterion,while the CFO advocates the MIRR.If the decision is made by choosing the project with the higher IRR rather than the one with the higher MIRR,how much,if any,value will be forgone,i.e.,what's the NPV of the chosen project versus the maximum possible NPV? Note that (1)"true value" is measured by NPV,and (2)under some conditions the choice of IRR vs.MIRR will have no effect on the value lost.

Accepted Answer

A)  $185.90
B)  $197.01
C)  $208.11
D)  $219.22
E)  $230.32

Question 8

Kosovski Company is considering Projects S and L,whose cash flows are shown below.These projects are mutually exclusive,equally risky,and are not repeatable.If the decision is made by choosing the project with the higher IRR,how much value will be forgone? Note that under some conditions choosing projects on the basis of the IRR will cause $0.00 value to be lost.

Accepted Answer

A)  $11.45
B)  $12.72
C)  $14.63
D)  $16.82
E)  $19.35

Question 9

Which of the following statements is CORRECT?

Accepted Answer

A)  For a project with normal cash flows, any change in the WACC will change both the NPV and the IRR.
B)  To find the MIRR, we first compound cash flows at the regular IRR to find the TV, and then we discount the TV at the WACC to find the PV.
C)  The NPV and IRR methods both assume that cash flows can be reinvested at the WACC. However, the MIRR method assumes reinvestment at the MIRR itself.
D)  If two projects have the same cost, and if their NPV profiles cross in the upper right quadrant, then the project with the higher IRR probably has more of its cash flows coming in the later years.
E)  If two projects have the same cost, and if their NPV profiles cross in the upper right quadrant, then the project with the lower IRR probably has more of its cash flows coming in the later years.

Question 10

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 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.
B)  The higher the WACC used to calculate the NPV, the lower the calculated NPV will be.
C)  If a project's NPV is greater than zero, then its IRR must be less than the WACC.
D)  If a project's NPV is greater than zero, then its IRR must be less than zero.
E)  The NPVs of relatively risky projects should be found using relatively low WACCs.

Question 11

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 one 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 12

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 13

The NPV and IRR methods,when used to evaluate two independent and equally risky projects,will lead to different accept/reject decisions and thus capital budgets if the projects' IRRs are greater than their costs of capital.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following statements is CORRECT?

Accepted Answer

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

Question 15

Fernando Designs is considering a project that has the following cash flow and WACC data.What is the project's discounted payback?

Accepted Answer

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

Question 16

Under certain conditions,a project may have more than one IRR.One such condition is when,in addition to the initial investment at time = 0,a negative cash flow (or cost)occurs at the end of the project's life.

Accepted Answer

A) True 
 B)False

Question 17

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 18

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 MIRR is always greater than its regular IRR.
B)  A project's MIRR is always less than its regular IRR.
C)  If a project's IRR is greater than its WACC, then the MIRR will be less than the IRR.
D)  If a project's IRR is greater than its WACC, then the MIRR will be greater than the IRR.
E)  To find a project's MIRR, we compound cash inflows at the IRR and then discount the terminal value back to t = 0 at the WACC.

Question 19

Warnock 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 projected 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 20

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

Accepted Answer

A) True 
 B)False

Exam 11: The Basics of Capital Budgeting

Thorley Inc.is considering a project that has the following cash flow data.What is the project's IRR? Note that a project's projected IRR can be less than the WACC or negative,in both cases it will be rejected.

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

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

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?

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.

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.

The NPV and IRR methods,when used to evaluate two independent and equally risky projects,will lead to different accept/reject decisions and thus capital budgets if the projects' IRRs are greater than their costs of capital.

Which of the following statements is CORRECT?

Fernando Designs is considering a project that has the following cash flow and WACC data.What is the project's discounted payback?

Under certain conditions,a project may have more than one IRR.One such condition is when,in addition to the initial investment at time = 0,a negative cash flow (or cost)occurs at the end of the project's life.

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.

Warnock 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 projected NPV can be negative,in which case it will be rejected.

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