Question 1

Projects A and B are mutually exclusive and have normal cash flows. Project A has an IRR of 15% and B's IRR is 20%. The company's cost of capital is 12%, and at that rate Project A has the higher NPV. Which of the following statements is CORRECT?

Accepted Answer

A)   assuming the timing pattern of the two projects' cash flows is the same, project b probably has a higher cost (and larger scale) .
B)   assuming the two projects have the same scale, project b probably has a faster payback than project a.
C)   the crossover rate for the two projects must be 12%.
D)   since b has the higher irr, then it must also have the higher npv if the crossover rate is less than the cost of capital of 12%.
E)   the crossover rate for the two projects must be less than 12%.F) C) and E)
G) A) and B)

Question 2

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

Question 3

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.F) A) and E)
G) A) and B)

Question 4

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 5

Which of the following statements is CORRECT?

Accepted Answer

A)   the payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects.
B)   the discounted payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects.
C)   the net present value method (npv)  is generally regarded by academics as being the best single method for evaluating capital budgeting projects.
D)   the modified internal rate of return method (mirr)  is generally regarded by academics as being the best single method for evaluating capital budgeting projects.
E)   the internal rate of return method (irr)  is generally regarded by academics as being the best single method for evaluating capital budgeting projects.F) A) and B)
G) A) and C)

Question 6

Which of the following statements is CORRECT?

Accepted Answer

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

Question 7

When evaluating mutually exclusive projects, the modified IRR (MIRR) always leads to the same capital budgeting decisions as the NPV method, regardless of the relative lives or sizes of the projects being evaluated.

Accepted Answer

A) True 
 B)False

Question 8

An increase in the firm's cost of capital will decrease projects' NPVs, which could change the accept/reject decision for any potential project. However, such a change would have no impact on projects' IRRs. Therefore, the accept/reject decision under the IRR method is independent of the cost of capital.

Accepted Answer

A) True 
 B)False

Question 9

The NPV and IRR methods, when used to evaluate two equally risky but mutually exclusive projects, will lead to different accept/reject decisions and thus capital budgets if the cost of capital at which the projects' NPV profiles cross is less than the projects' cost of capital.

Accepted Answer

A) True 
 B)False

Question 10

Reed Enterprises is considering a project that has the following cash flow and cost of capital (r)  data. What is the project's NPV? Note that a project's expected NPV can be negative, in which case it will be rejected.  r10.00% Year 0123 Cash flows −$1,050$450$460$470\begin{array}{lcccc}r & 10.00 \% \	ext { Year }  & 0 & 1 & 2 & 3 \ 	ext { Cash flows }& -\$ 1,050 & \$ 450 & \$ 460 & \$ 470\end{array}r Year  Cash flows ​10.00%0−$1,050​1$450​2$460​3$470​

Accepted Answer

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

Question 11

Assuming that their NPVs based on the firm's cost of capital are equal, the NPV of a project whose cash flows accrue relatively rapidly will be more sensitive to changes in the discount rate than the NPV of a project whose cash flows come in later in its life.

Accepted Answer

A) True 
 B)False

Question 12

Consider two projects, X and Y. Project X's IRR is 19% and Project Y's IRR is 17%. The projects have the same risk and the same lives, and each has constant cash flows during each year of their lives. If the cost of capital is 10%, Project Y has a higher NPV than X. Given this information, which of the following statements is CORRECT?

Accepted Answer

A)   the crossover rate must be greater than 10%.
B)   if the cost of capital is 8%, project x will have the higher npv.
C)   if the cost of capital is 18%, project y will have the higher npv.
D)   project x is larger in the sense that it has the higher initial cost.
E)   the crossover rate must be less than 10%.F) C) and D)
G) B) and C)

Question 13

Which of the following statements is CORRECT?

Accepted Answer

A)   if two projects are mutually exclusive, then they are likely to have multiple irrs.
B)   if a project is independent, then it cannot have multiple irrs.
C)   multiple irrs can occur only if the signs of the cash flows change more than once.
D)   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.
E)   for a project to have more than one irr, then both irrs must be greater than the cost of capital.F) B) and E)
G) A) and E)

Question 14

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 cost of capital 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 cost of capital.
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 costs of capital.
E)   a project's npv is generally found by compounding the cash inflows at the cost of capital to find the terminal value (tv) , then discounting the tv at the irr to find its pv.F) B) and C)
G) C) and E)

Question 15

Shannon Co. is considering a project that has the following cash flow and cost of capital (r)  data. What is the project's discounted payback?  r=10.00% Year 01234 Cash flows −$950$525485445405\begin{array} { l c c c c c } &r=10.00 \%\	ext { Year } &0& 1 & 2 & 3 & 4 \	ext { Cash flows } & - \$ 950 & \$ 525 & 485 & 445 & 405\end{array} Year  Cash flows ​r=10.00%0−$950​1$525​2485​3445​4405​

Accepted Answer

A)   1.61 years
B)   1.79 years
C)   1.99 years
D)   2.22 years
E)   2.44 years F) None of the above
G) A) and B)

Question 16

Projects C and D both have normal cash flows and are mutually exclusive. Project C has a higher NPV if the cost of capital is less than 12%, whereas Project D has a higher NPV if the cost of capital exceeds 12%. Which of the following statements is CORRECT?

Accepted Answer

A)   project d is probably larger in scale than project c.
B)   project c probably has a faster payback.
C)   project c probably has a higher irr.
D)   the crossover rate between the two projects is below 12%.
E)   project d probably has a higher irr.F) B) and D)
G) C) and D)

Question 17

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 18

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 cost of capital (and even negative) , in which case it will be rejected.   Year  Cash flows 0123−$1,100$450$470$490\begin{array}{l}\begin{array} { l } 	ext { Year } \	ext { Cash flows }\end{array}\begin{array} { c c c c } 0 & 1 & 2 & 3 \\hline - \$ 1,100 & \$ 450 & \$ 470 & \$ 490\end{array}\end{array} Year  Cash flows ​0−$1,100​1$450​2$470​3$490​​​

Accepted Answer

A)   9.70%
B)   10.78%
C)   11.98%
D)   13.31%
E)   14.64% F) B) and C)
G) All of the above

Question 19

Ellmann Systems is considering a project that has the following cash flow and cost of capital (r)  data. What is the project's NPV? Note that if a project's expected NPV is negative, it should be rejected.  r9.00% Year: 0123 FCF: −$1000$500$500$500\begin{array}{lccc}r& 9.00\%\	ext { Year: } &0& 1 & 2 & 3 \ 	ext { FCF: } & -\$ 1000 & \$ 500 & \$ 500& \$ 500\end{array}r Year:  FCF: ​9.00%0−$1000​1$500​2$500​3$500​

Accepted Answer

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

Question 20

Scott Enterprises is considering a project that has the following cash flow and cost of capital (r)  data. What is the project's NPV? Note that if a project's expected NPV is negative, it should be rejected.  r11.00% Year: 01234 Cash flows −$1000$350$350$350$350\begin{array}{lccc}r& 11.00\%\	ext { Year: } &0& 1 & 2 & 3&4 \ 	ext { Cash flows } & -\$ 1000 & \$ 350 & \$  350& \$  350& \$  350\end{array}r Year:  Cash flows ​11.00%0−$1000​1$350​2$350​3$350​4$350​

Accepted Answer

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

Exam 12: Capital Budgeting: Decision Criteria

Which of the following statements is CORRECT?

Correct Answer
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Projects A and B are mutually exclusive and have normal cash flows. Project A has an IRR of 15% and B's IRR is 20%. The company's cost of capital is 12%, and at that rate Project A has the higher NPV. Which of the following statements is CORRECT?

Correct Answer
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Correct Answer
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Projects C and D both have normal cash flows and are mutually exclusive. Project C has a higher NPV if the cost of capital is less than 12%, whereas Project D has a higher NPV if the cost of capital exceeds 12%. Which of the following statements is CORRECT?

Correct Answer
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Correct Answer
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The NPV and IRR methods, when used to evaluate two equally risky but mutually exclusive projects, will lead to different accept/reject decisions and thus capital budgets if the cost of capital at which the projects' NPV profiles cross is less than the projects' cost of capital.

Correct Answer
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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.

Correct Answer
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Correct Answer
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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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Shannon Co. is considering a project that has the following cash flow and cost of capital (r) data. What is the project's discounted payback? $\begin{array} { l c c c c c } &r=10.00 \%\\\text { Year } &0& 1 & 2 & 3 & 4 \\\text { Cash flows } & - \$ 950 & \$ 525 & 485 & 445 & 405\end{array}$

Correct Answer
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Correct Answer
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Assuming that their NPVs based on the firm's cost of capital are equal, the NPV of a project whose cash flows accrue relatively rapidly will be more sensitive to changes in the discount rate than the NPV of a project whose cash flows come in later in its life.

Correct Answer
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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 outflow followed by a series of inflows.

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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When evaluating mutually exclusive projects, the modified IRR (MIRR) always leads to the same capital budgeting decisions as the NPV method, regardless of the relative lives or sizes of the projects being evaluated.

Correct Answer
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Which of the following statements is CORRECT?

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

Correct Answer
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Exam 12: Capital Budgeting: Decision Criteria

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Projects A and B are mutually exclusive and have normal cash flows. Project A has an IRR of 15% and B's IRR is 20%. The company's cost of capital is 12%, and at that rate Project A has the higher NPV. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Projects C and D both have normal cash flows and are mutually exclusive. Project C has a higher NPV if the cost of capital is less than 12%, whereas Project D has a higher NPV if the cost of capital exceeds 12%. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The NPV and IRR methods, when used to evaluate two equally risky but mutually exclusive projects, will lead to different accept/reject decisions and thus capital budgets if the cost of capital at which the projects' NPV profiles cross is less than the projects' cost of capital.

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Assuming that their NPVs based on the firm's cost of capital are equal, the NPV of a project whose cash flows accrue relatively rapidly will be more sensitive to changes in the discount rate than the NPV of a project whose cash flows come in later in its life.

Correct AnswerverifiedShow Answer

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

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

When evaluating mutually exclusive projects, the modified IRR (MIRR) always leads to the same capital budgeting decisions as the NPV method, regardless of the relative lives or sizes of the projects being evaluated.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct Answer
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