Question 1

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

Question 2

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 3

A company is choosing between two projects.The larger project has an initial cost of $100,000,annual cash flows of $30,000 for 5 years,and an IRR of 15.24%.The smaller project has an initial cost of $51,600,annual cash flows of $16,000 for 5 years,and an IRR of 16.65%.The projects are equally risky.Which of the following statements is CORRECT?

Accepted Answer

A)   Since the smaller project has the higher IRR,the two projects' NPV profiles cannot cross,and the smaller project's NPV will be higher at all positive values of WACC.
B)   Since the smaller project has the higher IRR,the two projects' NPV profiles will cross,and the larger project will look better based on the NPV at all positive values of WACC.
C)   If the company uses the NPV method,it will tend to favor smaller,shorter-term projects over larger,longer-term projects,regardless of how high or low the WACC is.
D)   Since the smaller project has the higher IRR but the larger project has the higher NPV at a zero discount rate,the two projects' NPV profiles will cross,and the larger project will have the higher NPV if the WACC is less than the crossover rate.
E)   Since the smaller project has the higher IRR and the larger NPV at a zero discount rate,the two projects' NPV profiles will cross,and the smaller project will look better if the WACC is less than the crossover rate.F) B) and C)
G) A) and D)

Question 4

Yonan Inc.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.

Accepted Answer

A)   $35.82
B)   $43.16
C)   $53.08
D)   $51.36
E)   $38.41F) None of the above
G) D) and E)

Question 5

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?

Accepted Answer

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) C) and D)

Question 6

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 7

Warr Company 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. ​
​

Accepted Answer

A)   3.98%
B)   5.00%
C)   5.10%
D)   5.61%
E)   6.33%F) A) and B)
G) None of the above

Question 8

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 WACC is 12%,and at that rate Project A has the higher NPV.Which of the following statements is CORRECT?

Accepted Answer

A)   The crossover rate for the two projects must be less than 12%.
B)   Assuming the timing pattern of the two projects' cash flows is the same,Project B probably has a higher cost (and larger scale) .
C)   Assuming the two projects have the same scale,Project B probably has a faster payback than Project A.
D)   The crossover rate for the two projects must be 12%.
E)   Since B has the higher IRR,then it must also have the higher NPV if the crossover rate is less than the WACC of 12%.F) A) and C)
G) C) and E)

Question 9

Both the regular and the modified IRR (MIRR)methods have wide appeal to professors,but most business executives prefer the NPV method to either of the IRR methods.

Accepted Answer

A) True 
 B)False

Question 10

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 MIRR is always greater than its regular IRR.
B)   A project's MIRR is always less than its regular IRR.
C)   If a project's IRR is greater than its WACC,then the MIRR will be less than the IRR.
D)   If a project's IRR is greater than its WACC,then the MIRR will be greater than the IRR.
E)   To find a project's MIRR,we compound cash inflows at the IRR and then discount the terminal value back to t = 0 at the WACC.F) A) and C)
G) A) and D)

Question 11

Mansi Inc.is considering a project that has the following cash flow data.What is the project's payback?

Accepted Answer

A)   1.80 years
B)   1.78 years
C)   1.95 years
D)   2.07 years
E)   1.66 yearsF) A) and E)
G) A) and D)

Question 12

Which of the following statements is CORRECT?

Accepted Answer

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

Question 13

Harry's 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 projected NPV is negative,it should be rejected.

Accepted Answer

A)   52.18
B)   49.25
C)   48.76
D)   41.45
E)   55.10F) D) and E)
G) A) and D)

Question 14

Simkins Renovations 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 (and even negative) ,in which case it will be rejected. ​

Accepted Answer

A)   13.59%
B)   17.24%
C)   11.40%
D)   15.20%
E)   14.61%F) D) and E)
G) A) and E)

Question 15

When considering two mutually exclusive projects,the firm should always select the project whose internal rate of return is the highest,provided the projects have the same initial cost.This statement is true regardless of whether the projects can be repeated or not.

Accepted Answer

A) True 
 B)False

Question 16

Malholtra 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 projected MIRR can be less than the WACC (and even negative) ,in which case it will be rejected.

Accepted Answer

A)   13.04%
B)   9.16%
C)   14.10%
D)   11.98%
E)   11.75%F) C) and D)
G) A) and E)

Question 17

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 projected NPV is negative,it should be rejected.

Accepted Answer

A)   8.11
B)   11.42
C)   8.77
D)   9.91
E)   9.43F) A) and D)
G) A) and B)

Question 18

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

Accepted Answer

A)   $269.77
B)   $317.37
C)   $377.68
D)   $339.59
E)   $345.94F) B) and D)
G) A) and D)

Question 19

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 527.01%,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 that the firm's value will increase if the project is accepted.
D)   You should recommend that the project be rejected because (1) its NPV is positive and (2) 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) B) and C)

Question 20

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?

Accepted Answer

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) None of the above
G) B) and C)

Exam 12: The Basics of Capital Budgeting

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 WACC 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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Harry's 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 projected NPV is negative,it should be rejected.

Correct Answer
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Simkins Renovations 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 (and even negative) ,in which case it will be rejected.

Correct Answer
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Correct Answer
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Malholtra 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 projected 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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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
verified

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
verified

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 projected NPV is negative,it should be rejected.

Correct Answer
verified

Both the regular and the modified IRR (MIRR)methods have wide appeal to professors,but most business executives prefer the NPV method to either of the IRR methods.

Correct Answer
verified

Correct Answer
verified

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

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
verified

Mansi Inc.is considering a project that has the following cash flow data.What is the project's payback?

Correct Answer
verified

Correct Answer
verified

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
verified

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?

Correct Answer
verified

Warr Company 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.

Correct Answer
verified

When considering two mutually exclusive projects,the firm should always select the project whose internal rate of return is the highest,provided the projects have the same initial cost.This statement is true regardless of whether the projects can be repeated or not.

Correct Answer
verified

Exam 12: The Basics of Capital Budgeting

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 WACC is 12%,and at that rate Project A has the higher NPV.Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Harry's 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 projected NPV is negative,it should be rejected.

Correct AnswerverifiedShow Answer

Simkins Renovations 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 (and even negative) ,in which case it will be rejected. ​

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Malholtra 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 projected 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

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

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

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 projected NPV is negative,it should be rejected.

Correct AnswerverifiedShow Answer

Both the regular and the modified IRR (MIRR)methods have wide appeal to professors,but most business executives prefer the NPV method to either of the IRR methods.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

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

Mansi Inc.is considering a project that has the following cash flow data.What is the project's payback?

Correct AnswerverifiedShow Answer

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

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?

Correct AnswerverifiedShow Answer

Warr Company 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. ​ ​

Correct AnswerverifiedShow Answer

When considering two mutually exclusive projects,the firm should always select the project whose internal rate of return is the highest,provided the projects have the same initial cost.This statement is true regardless of whether the projects can be repeated or not.

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Simkins Renovations 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 (and even negative) ,in which case it will be rejected.

Correct Answer
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Correct Answer
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Warr Company 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.

Correct Answer
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Correct Answer
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