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 NPV is found by compounding the cash inflows at the IRR to find the terminal value (TV) , then discounting the TV at the WACC.
B)   The lower the WACC used to calculate a project's NPV, the lower the calculated NPV will be.
C)   If a project's NPV is less 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 NPV of a relatively low-risk project should be found using a relatively high WACC.F) C) and E)
G) A) and D) C

Question 2

Last month, Lloyd's Systems analyzed the project whose cash flows are shown below. However, before the decision to accept or reject the project took place, 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.

Accepted Answer

A)   -$18.89
B)   -$19.88
C)   -$20.93
D)   -$22.03
E)   -$23.13F) C) and E)
G) A) and B)

Question 3

Which of the following statements is CORRECT?

Accepted Answer

A)   The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the IRR.
B)   The NPV method assumes that cash flows will be reinvested at the risk-free rate, while the IRR method assumes reinvestment at the IRR.
C)   The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the risk-free rate.
D)   The NPV method does not consider all relevant cash flows, particularly cash flows beyond the payback period.
E)   The IRR method does not consider all relevant cash flows, particularly cash flows beyond the payback period.F) A) and E)
G) C) and D)

Question 4

The primary reason that the NPV method is conceptually superior to the IRR method for evaluating mutually exclusive investments is that multiple IRRs may exist, and when that happens, we don't know which IRR is relevant.

Accepted Answer

A) True 
 B)False

Question 5

Conflicts between two mutually exclusive projects occasionally occur, where the NPV method ranks one project higher but the IRR method ranks the other one first. In theory, such conflicts should be resolved in favor of the project with the higher positive IRR.

Accepted Answer

A) True 
 B)False  False

Question 6

A firm is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. The CEO wants to use the IRR criterion, while the CFO favors the NPV method. You were hired to advise the firm on the best procedure. If the wrong decision criterion is used, how much potential value would the firm lose?

Accepted Answer

A)   $188.68
B)   $198.61
C)   $209.07
D)   $219.52
E)   $230.49F) All of the above
G) D) and E)

Question 7

Which of the following statements is CORRECT? Assume that all projects being considered have normal cash flows and are equally risky.

Accepted Answer

A)   If a project's IRR is equal to its WACC, then, under all reasonable conditions, the project's NPV must be negative.
B)   If a project's IRR is equal to its WACC, then under all reasonable conditions, the project's IRR must be negative.
C)   If a project's IRR is equal to its WACC, then under all reasonable conditions the project's NPV must be zero.
D)   There is no necessary relationship between a project's IRR, its WACC, and its NPV.
E)   When evaluating mutually exclusive projects, those projects with relatively long lives will tend to have relatively high NPVs when the cost of capital is relatively high.F) B) and D)
G) B) and C)

Question 8

Suppose a firm relies exclusively on the payback method when making capital budgeting decisions, and it sets a 4-year payback regardless of economic conditions. Other things held constant, which of the following statements is most likely to be true?

Accepted Answer

A)   It will accept too many short-term projects and reject too many long-term projects (as judged by the NPV) .
B)   It will accept too many long-term projects and reject too many short-term projects (as judged by the NPV) .
C)   The firm will accept too many projects in all economic states because a 4-year payback is too low.
D)   The firm will accept too few projects in all economic states because a 4-year payback is too high.
E)   If the 4-year payback results in accepting just the right set of projects under average economic conditions, then this payback will result in too few long-term projects when the economy is weak.F) A) and D)
G) A) and C)

Question 9

Barry Company is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that a project's expected NPV can be negative, in which case it will be rejected.

Accepted Answer

A)   $250.15
B)   $277.94
C)   $305.73
D)   $336.31
E)   $369.94F) A) and C)
G) D) and E)

Question 10

Under certain conditions, a project may have more than one IRR. One such condition is when, in addition to the initial investment at time = 0, a negative cash flow (or cost) occurs at the end of the project's life.

Accepted Answer

A) True 
 B)False

Question 11

You are on the staff of Camden Inc. The CFO believes project acceptance should be based on the NPV, but Steve Camden, 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 its NPV is negative and its IRR is less than the WACC.
B)   You should recommend that the project be rejected because, although its NPV is positive, it has an IRR that is less than the WACC.
C)   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.
D)   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.
E)   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.F) B) and E)
G) D) and E)

Question 12

Which of the following statements is CORRECT?

Accepted Answer

A)   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.
B)   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.
C)   Multiple IRRs can exist, but not multiple MIRRs. This is one reason some people favor the MIRR over the regular IRR.
D)   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.
E)   The percentage difference between the MIRR and the IRR is equal to the project's WACC.F) C) and D)
G) All of the above

Question 13

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 14

Hindelang Inc. is considering a project that has the following cash flow and WACC data. What is the project's MIRR? Note that a project's MIRR can be less than the WACC (and even negative) , in which case it will be rejected.

Accepted Answer

A)   13.42%
B)   14.91%
C)   16.56%
D)   18.22%
E)   20.04%F) All of the above
G) A) and B) C

Question 15

Simms Corp. 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 WACC or negative, in both cases it will be rejected.

Accepted Answer

A)   12.55%
B)   13.21%
C)   13.87%
D)   14.56%
E)   15.29%F) B) and D)
G) C) and E)

Question 16

For a project with one initial cash outflow followed by a series of positive cash inflows, the modified IRR (MIRR) method involves compounding the cash inflows out to the end of the project's life, summing those compounded cash flows to form a terminal value (TV), and then finding the discount rate that causes the PV of the TV to equal the project's cost.

Accepted Answer

A) True 
 B)False

Question 17

Westchester Corp. is considering two equally risky, mutually exclusive projects, both of which have normal cash flows. Project A has an IRR of 11%, while Project B's IRR is 14%. When the WACC is 8%, the projects have the same NPV. Given this information, which of the following statements is CORRECT?

Accepted Answer

A)   If the WACC is 13%, Project A's NPV will be higher than Project B's.
B)   If the WACC is 9%, Project A's NPV will be higher than Project B's.
C)   If the WACC is 6%, Project B's NPV will be higher than Project A's.
D)   If the WACC is greater than 14%, Project A's IRR will exceed Project B's.
E)   If the WACC is 9%, Project B's NPV will be higher than Project A's.F) C) and D)
G) A) and B)

Question 18

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 expected NPV is negative, it should be rejected.

Accepted Answer

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

Question 19

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 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) C) and E)
G) C) and D)

Question 20

Which of the following statements is CORRECT?

Accepted Answer

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

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

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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C

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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The primary reason that the NPV method is conceptually superior to the IRR method for evaluating mutually exclusive investments is that multiple IRRs may exist, and when that happens, we don't know which IRR is relevant.

Correct Answer
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Conflicts between two mutually exclusive projects occasionally occur, where the NPV method ranks one project higher but the IRR method ranks the other one first. In theory, such conflicts should be resolved in favor of the project with the higher positive IRR.

Correct Answer
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False

Correct Answer
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Which of the following statements is CORRECT? Assume that all projects being considered have normal cash flows and are equally risky.

Correct Answer
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Suppose a firm relies exclusively on the payback method when making capital budgeting decisions, and it sets a 4-year payback regardless of economic conditions. Other things held constant, which of the following statements is most likely to be true?

Correct Answer
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Barry Company is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that a project's expected NPV can be negative, in which case it will be rejected.

Correct Answer
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Under certain conditions, a project may have more than one IRR. One such condition is when, in addition to the initial investment at time = 0, a negative cash flow (or cost) occurs at the end of the project's life.

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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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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Hindelang Inc. is considering a project that has the following cash flow and WACC data. What is the project's MIRR? Note that a project's MIRR can be less than the WACC (and even negative) , in which case it will be rejected.

Correct Answer
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C

Simms Corp. 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 WACC or negative, in both cases it will be rejected.

Correct Answer
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Correct Answer
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Westchester Corp. is considering two equally risky, mutually exclusive projects, both of which have normal cash flows. Project A has an IRR of 11%, while Project B's IRR is 14%. When the WACC is 8%, the projects have the same NPV. Given this information, 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 expected NPV is negative, it should be rejected.

Correct Answer
verified

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

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 AnswerverifiedC

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

The primary reason that the NPV method is conceptually superior to the IRR method for evaluating mutually exclusive investments is that multiple IRRs may exist, and when that happens, we don't know which IRR is relevant.

Correct AnswerverifiedShow Answer

Conflicts between two mutually exclusive projects occasionally occur, where the NPV method ranks one project higher but the IRR method ranks the other one first. In theory, such conflicts should be resolved in favor of the project with the higher positive IRR.

Correct AnswerverifiedFalse

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT? Assume that all projects being considered have normal cash flows and are equally risky.

Correct AnswerverifiedShow Answer

Suppose a firm relies exclusively on the payback method when making capital budgeting decisions, and it sets a 4-year payback regardless of economic conditions. Other things held constant, which of the following statements is most likely to be true?

Correct AnswerverifiedShow Answer

Barry Company is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that a project's expected NPV can be negative, in which case it will be rejected.

Correct AnswerverifiedShow Answer

Under certain conditions, a project may have more than one IRR. One such condition is when, in addition to the initial investment at time = 0, a negative cash flow (or cost) occurs at the end of the project's life.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

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

Hindelang Inc. is considering a project that has the following cash flow and WACC data. What is the project's MIRR? Note that a project's MIRR can be less than the WACC (and even negative) , in which case it will be rejected.

Correct AnswerverifiedC

Simms Corp. 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 WACC or negative, in both cases it will be rejected.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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 expected NPV is negative, it should be rejected.

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 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

Correct Answer
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C

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False

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C

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