Question 1

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.F) All of the above
G) D) and E)

Question 2

Which of the following statements is CORRECT?

Accepted Answer

A)   The shorter a project's payback period, the less desirable the project is normally considered to be by this criterion.
B)   One drawback of the payback criterion is that this method does not take account of cash flows beyond the payback period.
C)   If a project's payback is positive, then the project should be accepted because it must have a positive NPV.
D)   The regular payback ignores cash flows beyond the payback period, but the discounted payback method overcomes this problem.
E)   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.F) C) and D)
G) D) and E)

Question 3

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.F) B) and E)
G) All of the above

Question 4

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)   $230.32F) A) and D)
G) B) and E)

Question 5

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 yearsF) A) and D)
G) All of the above

Question 6

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

Question 7

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.F) C) and E)
G) None of the above

Question 8

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.F) All of the above
G) A) and C)

Question 9

Last month, Lloyd's Systems analyzed the project whose cash flows are shown below. However, before the decision 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)   -$18.89
B)   -$19.88
C)   -$20.93
D)   -$22.03
E)   -$23.13F) None of the above
G) A) and B)

Question 10

Which of the following statements is CORRECT?

Accepted Answer

A)   One advantage of the NPV over the IRR is that NPV takes account of cash flows over a project's full life whereas IRR does not.
B)   One advantage of the NPV over the IRR is that NPV assumes that cash flows will be reinvested at the WACC, whereas IRR assumes that cash flows are reinvested at the IRR. The NPV assumption is generally more appropriate.
C)   One advantage of the NPV over the MIRR method is that NPV takes account of cash flows over a project's full life whereas MIRR does not.
D)   One advantage of the NPV over the MIRR method is that NPV discounts cash flows whereas the MIRR is based on undiscounted cash flows.
E)   Since cash flows under the IRR and MIRR are both discounted at the same rate (the WAC
C)  , these two methods always rank mutually exclusive projects in the same order.F) A) and E)
G) A) and D)

Question 11

Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one cash outflow at t = 0 followed by a series of positive cash flows.

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 its MIRR will be greater than the IRR.
D)   To find a project's MIRR, we compound cash inflows at the regular IRR and then find the discount rate that causes the PV of the terminal value to equal the initial cost.
E)   To find a project's MIRR, the textbook procedure compounds cash inflows at the WACC and then finds the discount rate that causes the PV of the terminal value to equal the initial cost.F) B) and E)
G) C) and E)

Question 12

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 13

Ehrmann Data Systems 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)   9.32%
B)   10.35%
C)   11.50%
D)   12.78%
E)   14.20%F) A) and B)
G) None of the above

Question 14

Projects S and L both have normal cash flows, and the projects have the same risk, hence both are evaluated with the same WACC, 10%. However, S has a higher IRR than L. Which of the following statements is CORRECT?

Accepted Answer

A)   Project S must have a higher NPV than Project L.
B)   If Project S has a positive NPV, Project L must also have a positive NPV.
C)   If the WACC falls, each project's IRR will increase.
D)   If the WACC increases, each project's IRR will decrease.
E)   If Projects S and L have the same NPV at the current WACC, 10%, then Project L, the one with the lower IRR, would have a higher NPV if the WACC used to evaluate the projects declined.F) C) and D)
G) A) and B)

Question 15

The NPV method's assumption that cash inflows are reinvested at the cost of capital is generally more reasonable than the IRR's assumption that cash flows are reinvested at the IRR. This is an important reason why the NPV method is generally preferred over the IRR method.

Accepted Answer

A) True 
 B)False

Question 16

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)   -$48.08F) A) and D)
G) None of the above

Question 17

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)   $94.66F) B) and D)
G) A) and E)

Question 18

Ingram Electric Products 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)   8.86%
B)   9.84%
C)   10.94%
D)   12.15%
E)   13.50%F) B) and E)
G) All of the above

Question 19

Harry's Inc. 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)   $105.89
B)   $111.47
C)   $117.33
D)   $123.51
E)   $130.01F) B) and C)
G) A) and E)

Question 20

Which of the following statements is CORRECT?

Accepted Answer

A)   The NPV method was once the favorite of academics and business executives, but today most authorities regard the MIRR as being the best indicator of a project's profitability.
B)   If the cost of capital declines, this lowers a project's NPV.
C)   The NPV method is regarded by most academics as being the best indicator of a project's profitability, hence most academics recommend that firms use only this one method and disregard other methods.
D)   A project's NPV depends on the total amount of cash flows the project produces, but because the cash flows are discounted at the WACC, it does not matter if the cash flows occur early or late in the project's life.
E)   The NPV and IRR methods may give different recommendations regarding which of two mutually exclusive projects should be accepted, but they always give the same recommendation regarding the acceptability of a normal, independent project.F) C) and E)
G) A) and B)

Exam 11: Capital Budgeting

Which of the following statements is CORRECT?

Correct Answer
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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?

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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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.

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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The NPV method's assumption that cash inflows are reinvested at the cost of capital is generally more reasonable than the IRR's assumption that cash flows are reinvested at the IRR. This is an important reason why the NPV method is generally preferred over the IRR method.

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

Correct Answer
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Projects S and L both have normal cash flows, and the projects have the same risk, hence both are evaluated with the same WACC, 10%. However, S has a higher IRR than L. Which of the following statements is CORRECT?

Correct Answer
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Correct Answer
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Ingram Electric Products 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.

Correct Answer
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Which of the following statements is CORRECT?

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

Correct Answer
verified

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.

Correct Answer
verified

Ehrmann Data Systems 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.

Correct Answer
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Harry's Inc. 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.

Correct Answer
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Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one cash outflow at t = 0 followed by a series of positive cash flows.

Correct Answer
verified

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.

Correct Answer
verified

Exam 11: Capital Budgeting

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

The NPV method's assumption that cash inflows are reinvested at the cost of capital is generally more reasonable than the IRR's assumption that cash flows are reinvested at the IRR. This is an important reason why the NPV method is generally preferred over the IRR method.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Projects S and L both have normal cash flows, and the projects have the same risk, hence both are evaluated with the same WACC, 10%. However, S has a higher IRR than L. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Ingram Electric Products 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.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Ehrmann Data Systems 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.

Correct AnswerverifiedShow Answer

Harry's Inc. 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.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one cash outflow at t = 0 followed by a series of positive cash flows.

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

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