Question 1

The WACC for two mutually exclusive projects that are being considered is 12%.Project K has an IRR of 20% while Project R's IRR is 15%.The projects have the same NPV at the 12% current WACC.Interest rates are currently high.However,you believe that money costs and thus your WACC will soon decline.You also think that the projects will not be funded until the WACC has decreased,and their cash flows will not be affected by the change in economic conditions.Under these conditions,which of the following statements is CORRECT?

Accepted Answer

A)   You should delay a decision until you have more information on the projects, even if this means that a competitor might come in and capture this market.
B)   You should recommend Project R, because at the new WACC it will have the higher NPV.
C)   You should recommend Project K, because at the new WACC it will have the higher NPV.
D)   You should recommend Project R because it will have both a higher IRR and a higher NPV under the new conditions.
E)   You should reject both projects because they will both have negative NPVs under the new conditions.F) B) and C)
G) C) and D)

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

Question 4

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 discounting the cash inflows at the WACC to find the present value (PV) , then compounding this PV to find the IRR.
B)   If a project's IRR is greater than the WACC, then its NPV must be negative.
C)   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.
D)   To find a project's IRR, we must find a discount rate that is equal to the WACC.
E)   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.F) B) and E)
G) B) and D)

Question 5

Ellmann Systems 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 expected NPV is negative,it should be rejected.   WACC: 9.00% Year 0123 Cash flows −$1.000$500$500$500\begin{array}{lcccc}	ext { WACC: } & 9.00 \% \	ext { Year } & 0 & 1 & 2 & 3 \ 	ext { Cash flows } & -\$ 1.000 & \$ 500 & \$ 500 & \$ 500\end{array} WACC:  Year  Cash flows ​9.00%0−$1.000​1$500​2$500​3$500​

Accepted Answer

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

Question 6

No 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 exceeds the rate at which the projects' NPV profiles cross.

Accepted Answer

A) True 
 B)False

Question 7

Current Design Co.is considering two mutually exclusive,equally risky,and not repeatable projects,S and L.Their cash flows are shown below.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.   WACC: 7.50% Year 01234CFS−$1,100$550$600$100$100CFL−$2,700$650$725$800$1,400\begin{array}{lccccc}	ext { WACC: } & 7.50 \% & & & \	ext { Year } & 0 & 1 & 2 & 3 & 4 \\mathrm{CF}_{\mathrm{S}} & -\$ 1,100 & \$ 550 & \$ 600 & \$ 100 & \$ 100 \\mathrm{CF}_{\mathrm{L}} & -\$ 2,700 & \$ 650 & \$ 725 & \$ 800 & \$ 1,400\end{array} WACC:  Year CFS​CFL​​7.50%0−$1,100−$2,700​1$550$650​2$600$725​3$100$800​4$100$1,400​

Accepted Answer

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

Question 8

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.

Accepted Answer

A) True 
 B)False

Question 9

Corner Jewelers,Inc.recently analyzed the project whose cash flows are shown below.However,before the company decided to accept or reject the project,the Federal Reserve 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 expected NPV can be negative,in which case it should be rejected. 
  Old WACC:  8.00%  New WACC: 11.25% Year 0123 Cash flows −$1,000$410$410$410\begin{array} { l c c c c } 	ext { Old WACC: } & 	ext { 8.00\% } & 	ext { New WACC: } & 11.25 \% \	ext { Year } & 0 & 1 & 2 & 3 \	ext { Cash flows } & - \$1,000 & \$ 410 & \$ 410 & \$ 410\end{array} Old WACC:  Year  Cash flows ​ 8.00% 0−$1,000​ New WACC: 1$410​11.25%2$410​3$410​

Accepted Answer

A)   -$59.03
B)   -$56.08
C)   -$53.27
D)   -$50.61
E)   -$48.08 F) A) and E)
G) A) and C)

Question 10

Which of the following statements is CORRECT?

Accepted Answer

A)   If a project has "normal" cash flows, then its MIRR must be positive.
B)   If a project has "normal" cash flows, then it will have exactly two real IRRs.
C)   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.
D)   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.
E)   If a project has "normal" cash flows, then its IRR must be positive.F) C) and E)
G) B) and E)

Question 11

Which of the following statements is CORRECT?

Accepted Answer

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

Question 12

Robbins 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 expected NPV is negative,it should be rejected.   WACC: 10.25% Year 012345 Cash flows −$1.000$300$300$300$300$300\begin{array} { l c c c c c c } 	ext { WACC: } & 10.25 \% \	ext { Year } &  0 &  1 &  2 &  3 &  4 & 5 \\hline	ext { Cash flows } & - \$ 1.000 & \$ 300 & \$ 300 &\$  300 & \$ 300 &\$ 300\end{array} WACC:  Year  Cash flows ​10.25%0−$1.000​1$300​2$300​3$300​4$300​5$300​​

Accepted Answer

A)   $105.89
B)   $111.47
C)   $117.33
D)   $123.51
E)   $130.01 F) A) and D)
G) All of the above

Question 13

Which of the following statements is CORRECT?

Accepted Answer

A)   One defect of the IRR method versus the NPV is that the IRR does not take account of the time value of money.
B)   One defect of the IRR method versus the NPV is that the IRR does not take account of the cost of capital.
C)   One defect of the IRR method versus the NPV is that the IRR values a dollar received today the same as a dollar that will not be received until sometime in the future.
D)   One defect of the IRR method versus the NPV is that the IRR does not take proper account of differences in the sizes of projects.
E)   One defect of the IRR method versus the NPV is that the IRR does not take account of cash flows over a project's full life.F) A) and E)
G) A) and D)

Question 14

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

Question 15

Which of the following statements is CORRECT?

Accepted Answer

A)   Projects with "normal" cash flows can have two or more real IRRs.
B)   Projects with "normal" cash flows must have two changes in the sign of the cash flows, e.g., from negative to positive to negative. If there are more than two sign changes, then the cash flow stream is "nonnormal."
C)   The "multiple IRR problem" can arise if a project's cash flows are "normal."
D)   Projects with "nonnormal" cash flows are almost never encountered in the real world.
E)   Projects with "normal" cash flows can have only one real IRR.F) A) and C)
G) B) and D)

Question 16

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.

Accepted Answer

A) True 
 B)False

Question 17

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 less than its regular IRR.
B)   If a project's IRR is greater than its WACC, then its MIRR will be greater than the IRR.
C)   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.
D)   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.
E)   A project's MIRR is always greater than its regular IRR.F) A) and B)
G) B) and D)

Question 18

You are on the staff of O'Hara Inc.The CFO believes project acceptance should be based on the NPV,but Andrew O'Hara,the president,insists that no project should be accepted unless its IRR exceeds the project's risk-adjusted WACC.Now you must make a recommendation on a project that has a cost of $15,000 and two cash flows: $110,000 at the end of Year 1 and -$100,000 at the end of Year 2.The president and the CFO both agree that the appropriate WACC for this project is 10%.At 10%,the NPV is $2,355.37,but you find two IRRs,one at 6.33% and one at 527%,and a MIRR of 11.32%.Which of the following statements best describes your optimal recommendation,i.e.,the analysis and recommendation that is best for the company and least likely to get you in trouble with either the CFO or the president?

Accepted Answer

A)   You should recommend that the project be rejected because, although its NPV is positive, it has an IRR that is less than the WACC.
B)   You should recommend that the project be accepted because (1)  its NPV is positive and (2)  although it has two IRRs, in this case it would be better to focus on the MIRR, which exceeds the WACC. You should explain this to the president and tell him that the firm's value will increase if the project is accepted.
C)   You should recommend that the project be rejected. Although its NPV is positive it has two IRRs, one of which is less than the WACC, which indicates that the firm's value will decline if the project is accepted.
D)   You should recommend that the project be rejected because, although its NPV is positive, its MIRR is less than the WACC, and that indicates that the firm's value will decline if it is accepted.
E)   You should recommend that the project be rejected because its NPV is negative and its IRR is less than the WACC.F) B) and C)
G) C) and D)

Question 19

Which of the following statements is CORRECT?

Accepted Answer

A)   For mutually exclusive projects with normal cash flows, the NPV and MIRR methods can never conflict, but their results could conflict with the discounted payback and the regular IRR methods.
B)   Multiple IRRs can exist, but not multiple MIRRs. This is one reason some people favor the MIRR over the regular IRR.
C)   If a firm uses the discounted payback method with a required payback of 4 years, then it will accept more projects than if it used a regular payback of 4 years.
D)   The percentage difference between the MIRR and the IRR is equal to the project's WACC.
E)   The NPV, IRR, MIRR, and discounted payback (using a payback requirement of 3 years or less)  methods always lead to the same accept/reject decisions for independent projects.F) B) and D)
G) All of the above

Question 20

McGlothin Inc.is considering a project that has the following cash flow data.What is the project's payback?   Year 0123 Cash flows −$1.150$500$500$500\begin{array}{lcccc}	ext { Year } & 0 & 1 & 2 & 3 \	ext { Cash flows } & -\$ 1.150 & \$ 500 & \$ 500 & \$ 500\end{array} Year  Cash flows ​0−$1.150​1$500​2$500​3$500​

Accepted Answer

A)   1.86 years
B)   2.07 years
C)   2.30 years
D)   2.53 years
E)   2.78 years F) A) and E)
G) A) and D)

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

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
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Which of the following statements is CORRECT?

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McGlothin Inc.is considering a project that has the following cash flow data.What is the project's payback? $\begin{array}{lcccc}\text { Year } & 0 & 1 & 2 & 3 \\\text { Cash flows } & -\$ 1.150 & \$ 500 & \$ 500 & \$ 500\end{array}$

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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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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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?

Correct Answer
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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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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.

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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No 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 exceeds the rate at which the projects' NPV profiles cross.

Correct Answer
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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.

Correct Answer
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Which of the following statements is CORRECT?

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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? 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

Which of the following statements is CORRECT?

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Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow 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 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

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?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

No 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 exceeds the rate at which the projects' NPV profiles cross.

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

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