Question 1

Simms Corp.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) 12.55% 
B) 13.21% 
C) 13.87% 
D) 14.56% 
E) 15.29%

Question 2

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 longer a project's payback period, the more desirable the project is normally considered to be by this criterion. 
B) One drawback of the payback criterion for evaluating projects is that this method does not properly account for the time value of money. 
C) If a project's payback is positive, then the project should be rejected because it must have a negative NPV. 
D) The regular payback ignores cash flows beyond the payback period, but the discounted payback method overcomes this problem. 
E) 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.

Question 3

Lasik Vision Inc.recently analyzed the project whose cash flows are shown below.However,before Lasik decided to accept or reject the project,the Federal Reserve took actions that changed interest rates and therefore the firm's WACC.The Fed's action did not affect the forecasted cash flows.By how much did the change in the WACC affect the project's forecasted NPV? Note that a project's projected NPV can be negative,in which case it should be rejected.

Accepted Answer

A) −$59.03 
B) −$56.08 
C) −$53.27 
D) −$50.61 
E) −$48.08

Question 4

Tesar Chemicals 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 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.

Accepted Answer

A) $138.10 
B) $149.21 
C) $160.31 
D) $171.42 
E) $182.52

Question 5

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 6

Four of the following statements are truly disadvantages of the regular payback method,but one is not a disadvantage of this method.Which one is NOT a disadvantage of the payback method?

Accepted Answer

A) Lacks an objective, market-determined benchmark for making decisions. 
B) Ignores cash flows beyond the payback period. 
C) Does not directly account for the time value of money. 
D) Does not provide any indication regarding a project's liquidity or risk. 
E) Does not take account of differences in size among projects.

Question 7

Warr Company 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) 14.05% 
B) 15.61% 
C) 17.34% 
D) 19.27% 
E) 21.20%

Question 8

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 9

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

Accepted Answer

A) 1.61 years 
B) 1.79 years 
C) 1.99 years 
D) 2.22 years 
E) 2.44 years

Question 10

Which of the following statements is CORRECT?

Accepted Answer

A) The MIRR and NPV decision criteria can never conflict. 
B) The IRR method can never be subject to the multiple IRR problem, while the MIRR method can be. 
C) 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. 
D) The higher the WACC, the shorter the discounted payback period. 
E) The MIRR method assumes that cash flows are reinvested at the crossover rate.

Question 11

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

Question 12

For 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 13

Which of the following statements is CORRECT?

Accepted Answer

A) For a project to have more than one IRR, then both IRRs must be greater than the WACC. 
B) If two projects are mutually exclusive, then they are likely to have multiple IRRs. 
C) If a project is independent, then it cannot have multiple IRRs. 
D) Multiple IRRs can only occur if the signs of the cash flows change more than once. 
E) If a project has two IRRs, then the smaller one is the one that is most relevant, and it should be accepted and relied upon.

Question 14

Which of the following statements is CORRECT?

Accepted Answer

A) One defect of the IRR method is that it does not take account of cash flows over a project's full life. 
B) One defect of the IRR method is that it does not take account of the time value of money. 
C) One defect of the IRR method is that it does not take account of the cost of capital. 
D) 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. 
E) 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.

Question 15

Suppose a firm relies exclusively on the payback method when making capital budgeting decisions,and it sets a 4-year payback regardless of economic conditions.Other things held constant,which of the following statements is most likely to be true?

Accepted Answer

A) It will accept too many short-term projects and reject too many long-term projects (as judged by the NPV). 
B) It will accept too many long-term projects and reject too many short-term projects (as judged by the NPV). 
C) The firm will accept too many projects in all economic states because a 4-year payback is too low. 
D) The firm will accept too few projects in all economic states because a 4-year payback is too high. 
E) If the 4-year payback results in accepting just the right set of projects under average economic conditions, then this payback will result in too few long-term projects when the economy is weak.

Question 16

Hindelang 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 projected MIRR can be less than the WACC (and even negative),in which case it will be rejected.

Accepted Answer

A) 13.42% 
B) 14.91% 
C) 16.56% 
D) 18.22% 
E) 20.04%

Question 17

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 terminal value (TV), then discounting this TV at the WACC. 
B) A project's regular IRR is found by discounting the cash inflows at the WACC to find the present value (PV), then compounding this PV to find the IRR. 
C) If a project's IRR is greater than the WACC, then its NPV must be negative. 
D) To find a project's IRR, we must solve for the discount rate that causes the PV of the inflows to equal the PV of the project's costs. 
E) To find a project's IRR, we must find a discount rate that is equal to the WACC.

Question 18

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 19

Projects S and L are equally risky,mutually exclusive,and have normal cash flows.Project S has an IRR of 15%,while Project L's IRR is 12%.The two projects have the same NPV when the WACC is 7%.Which of the following statements is CORRECT?

Accepted Answer

A) If the WACC is 10%, both projects will have positive NPVs. 
B) If the WACC is 6%, Project S will have the higher NPV. 
C) If the WACC is 13%, Project S will have the lower NPV. 
D) If the WACC is 10%, both projects will have a negative NPV. 
E) Project S's NPV is more sensitive to changes in WACC than Project L's.

Question 20

Tuttle Enterprises 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 projected NPV is negative,it should be rejected.

Accepted Answer

A) $77.49 
B) $81.56 
C) $85.86 
D) $90.15 
E) $94.66

Exam 11: The Basics of Capital Budgeting

Simms Corp.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.

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.

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

Four of the following statements are truly disadvantages of the regular payback method,but one is not a disadvantage of this method.Which one is NOT a disadvantage of the payback method?

Warr Company 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.

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.

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

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.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Suppose a firm relies exclusively on the payback method when making capital budgeting decisions,and it sets a 4-year payback regardless of economic conditions.Other things held constant,which of the following statements is most likely to be true?

Hindelang 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 projected MIRR 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.

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.

Projects S and L are equally risky,mutually exclusive,and have normal cash flows.Project S has an IRR of 15%,while Project L's IRR is 12%.The two projects have the same NPV when the WACC is 7%.Which of the following statements is CORRECT?

Tuttle Enterprises 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 projected NPV is negative,it should be rejected.