Question 1

The IRR of normal Project X is greater than the IRR of normal Project Y, and both IRRs are greater than zero.Also, the NPV of X is greater than the NPV of Y at the cost of capital.If the two projects are mutually exclusive, Project X should definitely be selected, and the investment made, provided we have confidence in the data.Put another way, it is impossible to draw NPV profiles that would suggest not accepting Project X.

Accepted Answer

A) True 
 B)False

Question 2

Martin Manufacturing is considering two normal, equally risky, mutually exclusive, but not repeatable projects.Martin's cost of capital is 10%.The two projects have the same investment costs, but Project A has an IRR of 15%, while Project B has an IRR of 20%.Assuming the projects' NPV profiles cross in the upper right quadrant, which of the following statements is CORRECT?

Accepted Answer

A)   Since the projects are mutually exclusive, the firm should always select Project B.
B)   If the crossover rate is 8%, Project B will have the higher NPV.
C)   Only one project has a positive NPV.
D)   If the crossover rate is 8%, Project A will have the higher NPV.
E)   Each project must have a negative NPV.F) A) and E)
G) None of the above

Question 3

Carolina 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.   r: 7.75% Year 01234CFS−$1,050$675$650CFL−$1,050$360$360$360$360\begin{array}{cccccc}	ext { r: } 7.75 \%\	ext { Year } & 0 & 1 & 2 & 3 & 4 \\hline\mathrm{CF}_{\mathrm{S}} & -\$ 1,050 & \$ 675 & \$ 650 & & \\mathrm{CF}_{\mathrm{L}} & -\$ 1,050 & \$ 360 & \$ 360 & \$ 360 & \$ 360\end{array} r: 7.75% Year CFS​CFL​​0−$1,050−$1,050​1$675$360​2$650$360​3$360​4$360​​

Accepted Answer

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

Question 4

Wiley's Wire Products is considering a project that has the following cash flow and cost of capital (r)  data.What is the project's MIRR? Note that a project's MIRR can be less than the cost of capital (and even negative) , in which case it will be rejected.  r=11.00% Year 0123 Cash flows −$800$350$350$350\begin{array} { l c c c c } & \mathrm { r } = 11.00 \% & & & \	ext { Year } & 0 & 1 & 2 & 3 \\hline  	ext { Cash flows } & - \$ 800 & \$ 350 & \$ 350 & \$ 350\end{array} Year  Cash flows ​r=11.00%0−$800​1$350​2$350​3$350​​

Accepted Answer

A)   8.86%
B)   9.84%
C)   10.94%
D)   12.15%
E)   13.50% F) B) and E)
G) B) and D)

Question 5

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 6

A basic rule in capital budgeting is that if a project's NPV exceeds its IRR, then the project should be accepted.

Accepted Answer

A) True 
 B)False

Question 7

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 0123 Cash flows −$1,100$450$470$490\begin{array} { l c c c c } 	ext { Year } & 0 & 1 & 2 & 3 \\hline  	ext { Cash flows } & - \$ 1,100 & \$ 450 & \$ 470 & \$ 490\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) A) and D)
G) None of the above

Question 8

Pet World 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 012345 Cash flows −$9,500$2,000$2,025$2,050$2,075$2,100\begin{array} { l c c c c c c } 	ext { Year } & 0 & 1 & 2 & 3 & 4 & 5 \\hline  	ext { Cash flows } & - \$ 9,500 & \$ 2,000 & \$ 2,025 & \$ 2,050 & \$ 2,075 & \$ 2,100\end{array} Year  Cash flows ​0−$9,500​1$2,000​2$2,025​3$2,050​4$2,075​5$2,100​​

Accepted Answer

A)   2.08%
B)   2.31%
C)   2.57%
D)   2.82%
E)   3.10% F) A) and D)
G) B) and C)

Question 9

Yoga Center Inc.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.  r:14.00% Year 01234 Cash flows −$1,200$400$425$450$475\begin{array} { l c c c c c } \mathrm { r } : & 14.00 \% \	ext { Year } & 0 & 1 & 2 & 3 & 4 \\hline  	ext { Cash flows } & - \$ 1,200 & \$ 400 & \$ 425 & \$ 450 & \$ 475\end{array}r: Year  Cash flows ​14.00%0−$1,200​1$400​2$425​3$450​4$475​​

Accepted Answer

A)   $41.25
B)   $45.84
C)   $50.93
D)   $56.59
E)   $62.88 F) None of the above
G) B) and E)

Question 10

You are considering two mutually exclusive, equally risky, projects.Both have IRRs that exceed the cost of capital.Which of the following statements is CORRECT? Assume that the projects have normal cash flows, with one outflow followed by a series of inflows.

Accepted Answer

A)   If the cost of capital is greater than the crossover rate, then the IRR and the NPV criteria will not result in a conflict between the projects.The same project will rank higher by both criteria.
B)   If the cost of capital is less than the crossover rate, then the IRR and the NPV criteria will not result in a conflict between the projects.The same project will rank higher by both criteria.
C)   For a conflict to exist between NPV and IRR, the initial investment cost of one project must exceed the cost of the other.
D)   For a conflict to exist between NPV and IRR, one project must have an increasing stream of cash flows over time while the other has a decreasing stream.If both sets of cash flows are increasing or decreasing, then it would be impossible for a conflict to exist, even if one project is larger than the other.
E)   If the two projects' NPV profiles do not cross, then there will be a sharp conflict as to which one should be selected.F) B) and E)
G) B) and C)

Question 11

Watts Co.is considering a project that has the following cash flow and cost of capital (r)  data.What is the project's MIRR? Note that a project's MIRR can be less than the cost of capital (and even negative) , in which case it will be rejected.  r=10.00% Year 01234 Cash flows −$850$300$320$340$360\begin{array} { l c c c c c } & r = 10.00 \% \	ext { Year } & 0 & 1 & 2 & 3 & 4 \\hline 	ext { Cash flows } & - \$ 850 & \$ 300 & \$ 320 & \$ 340 & \$ 360\end{array} Year  Cash flows ​r=10.00%0−$850​1$300​2$320​3$340​4$360​​

Accepted Answer

A)   14.08%
B)   15.65%
C)   17.21%
D)   18.94%
E)   20.83% F) A) and B)
G) A) and C)

Question 12

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 13

Silverman 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 MIRR rather than the one with the higher NPV, how much value will be forgone? Note that under some conditions choosing projects on the basis of the MIRR will cause $0.00 value to be lost.   r: 8.75% Year 01234CFS−$1,100$375$375$375$375CFL−$2,200$725$725$725$725\begin{array}{cccccc}	ext { r: } 8.75 \%\	ext { Year } & 0 & 1 & 2 & 3 & 4 \\hline \mathrm{CF}_{\mathrm{S}} & -\$ 1,100 & \$ 375 & \$ 375 & \$ 375 & \$ 375 \\mathrm{CF}_{\mathrm{L}} & -\$ 2,200 & \$ 725 & \$ 725 & \$ 725 & \$ 725\end{array} r: 8.75% Year CFS​CFL​​0−$1,100−$2,200​1$375$725​2$375$725​3$375$725​4$375$725​​

Accepted Answer

A)   $32.12
B)   $35.33
C)   $38.87
D)   $40.15
E)   $42.16 F) B) and D)
G) All of the above

Question 14

Which of the following statements is CORRECT?

Accepted Answer

A)   If the cost of capital declines, this lowers a project's NPV.
B)   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.
C)   A project's NPV depends on the total amount of cash flows the project produces, but because the cash flows are discounted at the cost of capital, it does not matter if the cash flows occur early or late in the project's life.
D)   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.
E)   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.F) A) and E)
G) A) and B)

Question 15

Which of the following statements is CORRECT?

Accepted Answer

A)   One advantage of the NPV over the IRR is that NPV assumes that cash flows will be reinvested at the cost of capital, whereas IRR assumes that cash flows are reinvested at the IRR.The NPV assumption is generally more appropriate.
B)   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.
C)   One advantage of the NPV over the MIRR method is that NPV discounts cash flows whereas the MIRR is based on undiscounted cash flows.
D)   Since cash flows under the IRR and MIRR are both discounted at the same rate (the cost of capital) , these two methods always rank mutually exclusive projects in the same order.
E)   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.F) All of the above
G) B) and C)

Question 16

Farmer 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 shorter payback, some value may be forgone.How much value will be lost in this instance? Note that under some conditions choosing projects on the basis of the shorter payback will not cause value to be lost.  r=10.25% Year 01234CFS−$950$500$800$0$0CFL−$2,100$400$800$800$1,000\begin{array} { c r r r r r }  \mathrm { r } = 10.25 \%\	ext { Year } &0 & 1 & 2 & 3 &{ 4 } \\hline  \mathrm { CF } _ { \mathrm { S } }  &-\$ 950 & \$ 500 & \$ 800 & \$ 0 & \$ 0 \\mathrm { CF } _ { \mathrm { L } } & -\$ 2,100 & \$ 400 & \$ 800 & \$ 800 & \$ 1,000\end{array}r=10.25% Year CFS​CFL​​0−$950−$2,100​1$500$400​2$800$800​3$0$800​4$0$1,000​​

Accepted Answer

A)   $24.14
B)   $26.82
C)   $29.80
D)   $33.11
E)   $36.42 F) B) and E)
G) A) and D)

Question 17

Which of the following statements is NOT a disadvantage of the regular payback method?

Accepted Answer

A)   Ignores cash flows beyond the payback period.
B)   Does not directly account for the time value of money.
C)   Does not provide any indication regarding a project's liquidity or risk.
D)   Does not take account of differences in size among projects.
E)   Lacks an objective, market-determined benchmark for making decisions.F) B) and C)
G) None of the above

Question 18

Nichols Inc.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 or negative, in both cases it will be rejected.   Year 012345 Cash flows −$1,250$325$325$325$325$325\begin{array} { l c c c c c c } 	ext { Year } & 0 & 1 & 2 & 3 & 4 & 5 \\hline  	ext { Cash flows } & - \$ 1,250 & \$ 325 & \$ 325 & \$ 325 & \$ 325 & \$ 325\end{array} Year  Cash flows ​0−$1,250​1$325​2$325​3$325​4$325​5$325​​

Accepted Answer

A)   9.43%
B)   9.91%
C)   10.40%
D)   10.92%
E)   11.47% F) A) and C)
G) A) and B)

Question 19

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) A) and E)
G) All of the above

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.  r:11.00% Year 01234 Cash flows −$1,000$350$350$350$350\begin{array} { l c c c c c } \mathrm { r } : & 11.00 \% \	ext { Year } & 0 & 1 & 2 & 3 & 4 \\hline 	ext { Cash flows } & - \$ 1,000 & \$ 350 & \$ 350 & \$ 350 & \$ 350\end{array}r: Year  Cash flows ​11.00%0−$1,000​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) C) and E)
G) C) and D)

Exam 10: The Basics of Capital Budgeting: Evaluating Cash Flows

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Which of the following statements is CORRECT?

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Which of the following statements is CORRECT?

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Which of the following statements is CORRECT?

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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.

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Which of the following statements is NOT a disadvantage of the regular payback method?

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A basic rule in capital budgeting is that if a project's NPV exceeds its IRR, then the project should be accepted.

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You are considering two mutually exclusive, equally risky, projects.Both have IRRs that exceed the cost of capital.Which of the following statements is CORRECT? Assume that the projects have normal cash flows, with one outflow followed by a series of inflows.

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Exam 10: The Basics of Capital Budgeting: Evaluating Cash Flows

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Which of the following statements is CORRECT?

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Which of the following statements is CORRECT?

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Which of the following statements is CORRECT?

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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 AnswerverifiedShow Answer

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Which of the following statements is NOT a disadvantage of the regular payback method?

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A basic rule in capital budgeting is that if a project's NPV exceeds its IRR, then the project should be accepted.

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You are considering two mutually exclusive, equally risky, projects.Both have IRRs that exceed the cost of capital.Which of the following statements is CORRECT? Assume that the projects have normal cash flows, with one outflow followed by a series of inflows.

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