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Which of the following statements is CORRECT?


A) The regular payback method recognizes all cash flows over a project's life.
B) The discounted payback method recognizes all cash flows over a project's life,and it also adjusts these cash flows to account for the time value of money.
C) The regular payback method was,years ago,widely used,but virtually no companies even calculate the payback today.
D) The regular payback is useful as an indicator of a project's liquidity because it gives managers an idea of how long it will take to recover the funds invested in a project.
E) The regular payback does not consider cash flows beyond the payback year,but the discounted payback overcomes this defect.

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

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Stern Associates is considering a project that has the following cash flow data.What is the project's payback? Stern Associates is considering a project that has the following cash flow data.What is the project's payback? A) 2.54 years B) 2.42 years C) 3.83 years D) 3.14 years E) 3.61 years


A) 2.54 years
B) 2.42 years
C) 3.83 years
D) 3.14 years
E) 3.61 years

F) B) and C)
G) C) and D)

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Which of the following statements is CORRECT?


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.

F) B) and D)
G) A) and B)

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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. 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. A) $62.75 B) $59.20 C) $53.28 D) $51.51 E) $65.71


A) $62.75
B) $59.20
C) $53.28
D) $51.51
E) $65.71

F) A) and D)
G) C) and D)

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

A) True
B) False

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Which of the following statements is CORRECT?


A) If a project has "normal" cash flows,then its IRR must be positive.
B) If a project has "normal" cash flows,then its MIRR must be positive.
C) If a project has "normal" cash flows,then it will have exactly two real IRRs.
D) The definition of "normal" cash flows is that the cash flow stream has one or more negative cash flows followed by a stream of positive cash flows and then one negative cash flow at the end of the project's life.
E) If a project has "normal" cash flows,then it can have only one real IRR,whereas a project with "nonnormal" cash flows might have more than one real IRR.

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

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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.


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.

F) A) and E)
G) C) and D)

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Which of the following statements is CORRECT?


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.

F) A) and E)
G) A) and C)

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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.

A) True
B) False

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Projects S and L both have an initial cost of $10,000,followed by a series of positive cash inflows.Project S's undiscounted net cash flows total $20,000,while L's total undiscounted flows are $30,000.At a WACC of 10%,the two projects have identical NPVs.Which project's NPV is more sensitive to changes in the WACC?


A) Project S.
B) Project L.
C) Both projects are equally sensitive to changes in the WACC since their NPVs are equal at all costs of capital.
D) Neither project is sensitive to changes in the discount rate,since both have NPV profiles that are horizontal.
E) The solution cannot be determined because the problem gives us no information that can be used to determine the projects' relative IRRs.

F) A) and B)
G) A) and C)

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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?


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.

F) A) and E)
G) A) and D)

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A conflict will exist between the NPV and IRR methods,when used to evaluate two equally risky but mutually exclusive projects,if the projects' cost of capital is less than the rate at which the projects' NPV profiles cross.

A) True
B) False

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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.

A) True
B) False

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Susmel Inc.is considering a project that has the following cash flow data.What is the project's payback? Susmel Inc.is considering a project that has the following cash flow data.What is the project's payback? A) 2.42 years B) 1.96 years C) 2.88 years D) 2.47 years E) 2.85 years


A) 2.42 years
B) 1.96 years
C) 2.88 years
D) 2.47 years
E) 2.85 years

F) All of the above
G) B) and C)

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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.

A) True
B) False

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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. 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. ​ A) 14.59% B) 15.18% C) 11.24% D) 16.20% E) 13.43% ​


A) 14.59%
B) 15.18%
C) 11.24%
D) 16.20%
E) 13.43%

F) C) and D)
G) B) and E)

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If you were evaluating two mutually exclusive projects for a firm with a zero cost of capital,the payback method and NPV method would always lead to the same decision on which project to undertake.

A) True
B) False

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


A) Project D probably has a higher IRR.
B) Project D is probably larger in scale than Project C.
C) Project C probably has a faster payback.
D) Project C probably has a higher IRR.
E) The crossover rate between the two projects is below 12%.

F) A) and E)
G) B) and C)

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An increase in the firm's WACC 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.

A) True
B) False

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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 greater than the crossover rate.

A) True
B) False

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