Question 1

Modern Refurbishing 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 WACC (and even negative) ,in which case it will be rejected.   Year 01234 Cash Elows −$850$300$290$200$270\begin{array} { l c c c c c } 	ext { Year } & 0 & 1 & 2 & 3 & 4 \	ext { Cash Elows } & - \$850 & \$300 & \$290 & \$200 & \$270\end{array} Year  Cash Elows ​0−$850​1$300​2$290​3$200​4$270​

Accepted Answer

A)   13.13%
B)   14.44%
C)   15.89%
D)   17.48%
E)   19.22% F) A) and C)
G) A) and B)

Question 2

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 WACC, 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 WAC
C)  , 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) A) and B)
G) B) and E)

Question 3

Consider projects S and L.Both have normal cash flows,and the projects have the same risk,hence both are evaluated with the same WACC,10%.However,S has a higher IRR than L.Which of the following statements is CORRECT?

Accepted Answer

A)   If Project S has a positive NPV, Project L must also have a positive NPV.
B)   If the WACC falls, each project's IRR will increase.
C)   If the WACC increases, each project's IRR will decrease.
D)   If Projects S and L have the same NPV at the current WACC, 10%, then Project L, the one with the lower IRR, would have a higher NPV if the WACC used to evaluate the projects declined.
E)   Project S must have a higher NPV than Project L.F) B) and C)
G) A) and E)

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

Langton Inc.is considering Projects S and L,whose cash flows are shown below.These projects are mutually exclusive,equally risky,and not repeatable.The CEO believes the IRR is the best selection criterion,while the CFO advocates the MIRR.If the decision is made by choosing the project with the higher IRR rather than the one with the higher MIRR,how much,if any,value will be forgone.In other words,what's the NPV of the chosen project versus the maximum possible NPV? Note that (1) "true value" is measured by NPV,and (2) under some conditions the choice of IRR vs.MIRR will have no effect on the value lost.   WACC: 7.00% Year 01234CFS−$1,100$550$600$100$100CFL−$2,750$725$725$800$1,400\begin{array}{lccccc}	ext { WACC: } & 7.00 \% & & & \	ext { Year } & 0 & 1 & 2 & 3 & 4 \ \mathrm{CF}_{\mathrm{S}} & -\$ 1,100 & \$ 550 & \$ 600 & \$ 100 & \$ 100 \\mathrm{CF}_{\mathrm{L}} & -\$ 2,750 & \$ 725 & \$ 725 & \$ 800 & \$ 1,400\end{array} WACC:  Year CFS​CFL​​7.00%0−$1,100−$2,750​1$550$725​2$600$725​3$100$800​4$100$1,400​

Accepted Answer

A)   $185.90
B)   $197.01
C)   $208.11
D)   $219.22
E)   $230.32 F) B) and E)
G) B) and C)

Question 6

The internal rate of return is that discount rate that equates the present value of the cash outflows (or costs)with the present value of the cash inflows.

Accepted Answer

A) True 
 B)False

Question 7

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 WACC, 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 B)
G) A) and C)

Question 8

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.   WACC: 7.75% Year 01234CFS−$1,050$675$650CFL−$1,050$360$360$360$360\begin{array}{lccccc}	ext { WACC: } & 7.75 \% \	ext { Year } & 0 & 1 & 2 & 3 & 4 \\mathrm{CF}_{\mathrm{S}} & -\$ 1,050 & \$ 675 & \$ 650 & & \\mathrm{CF}_{\mathrm{L}} & -\$ 1,050 & \$ 360 & \$ 360 & \$ 360 & \$ 360\end{array} WACC:  Year CFS​CFL​​7.75%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 C)
G) None of the above

Question 9

Which of the following statements is CORRECT?

Accepted Answer

A)   To find the MIRR, we first compound cash flows at the regular IRR to find the TV, and then we discount the TV at the WACC to find the PV.
B)   The NPV and IRR methods both assume that cash flows can be reinvested at the WACC. However, the MIRR method assumes reinvestment at the MIRR itself.
C)   If two projects have the same cost, and if their NPV profiles cross in the upper right quadrant, then the project with the higher IRR probably has more of its cash flows coming in the later years.
D)   If two projects have the same cost, and if their NPV profiles cross in the upper right quadrant, then the project with the lower IRR probably has more of its cash flows coming in the later years.
E)   For a project with normal cash flows, any change in the WACC will change both the NPV and the IRR.F) C) and E)
G) D) and E)

Question 10

Which of the following statements is CORRECT?

Accepted Answer

A)   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.
B)   The regular payback method was, years ago, widely used, but virtually no companies even calculate the payback today.
C)   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.
D)   The regular payback does not consider cash flows beyond the payback year, but the discounted payback overcomes this defect.
E)   The regular payback method recognizes all cash flows over a project's life.F) A) and B)
G) A) and C)

Question 11

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 WACC (and even negative) ,in which case it will be rejected.   Year 0123 Cash flows −$1,100$450$470$490\begin{array}{lcccc}	ext { Year } & 0 & 1 & 2 & 3 \ 	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) A) and C)

Question 12

A project's IRR is independent of the firm's cost of capital.In other words,a project's IRR doesn't change with a change in the firm's cost of capital.

Accepted Answer

A) True 
 B)False

Question 13

Projects C and D both have normal cash flows and are mutually exclusive.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 is probably larger in scale than Project C.
B)   Project C probably has a faster payback.
C)   Project C probably has a higher IRR.
D)   The crossover rate between the two projects is below 12%.
E)   Project D probably has a higher IRR.F) C) and D)
G) B) and D)

Question 14

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 IRR must be negative.
B)   If a project's IRR is equal to its WACC, then under all reasonable conditions the project's NPV must be zero.
C)   There is no necessary relationship between a project's IRR, its WACC, and its NPV.
D)   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.
E)   If a project's IRR is equal to its WACC, then, under all reasonable conditions, the project's NPV must be negative.F) A) and B)
G) C) and D)

Question 15

Suzanne's Cleaners is considering a project that has the following cash flow data.What is the project's payback?   Year 012345 Cash flowr −$1,100$300$310$320$330$340\begin{array} { l c c c c c c } 	ext { Year } & 0 & 1 & 2 & 3 & 4 & 5 \	ext { Cash flowr } & - \$1,100 & \$300 & \$310 & \$320 & \$330 & \$340\end{array} Year  Cash flowr ​0−$1,100​1$300​2$310​3$320​4$330​5$340​

Accepted Answer

A)   2.31 years
B)   2.56 years
C)   2.85 years
D)   3.16 years
E)   3.52 years F) A) and C)
G) A) and B)

Question 16

Martin Manufacturing is considering two normal,equally risky,mutually exclusive,but not repeatable projects.Martin's WACC 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) C) and D)
G) D) and E)

Question 17

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 18

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 19

Westwood Painting Co.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.   WACC: 12.25% Year 01234 Cash flows −$850$300$320$340$360\begin{array}{lccccc}	ext { WACC: } & 12.25 \% \	ext { Year } & 0 & 1 & 2 & 3 & 4 \ 	ext { Cash flows } & -\$ 850 & \$ 300 & \$ 320 & \$ 340 & \$ 360\end{array} WACC:  Year  Cash flows ​12.25%0−$850​1$300​2$320​3$340​4$360​

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 D)

Question 20

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)   The higher the WACC used to calculate the NPV, the lower the calculated NPV will be.
B)   If a project's NPV is greater than zero, then its IRR must be less than the WACC.
C)   If a project's NPV is greater than zero, then its IRR must be less than zero.
D)   The NPVs of relatively risky projects should be found using relatively low WACCs.
E)   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.F) B) and D)
G) A) and D)

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

Which of the following statements is CORRECT?

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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Consider projects S and L.Both have normal cash flows,and the projects have the same risk,hence both are evaluated with the same WACC,10%.However,S has a higher IRR than L.Which of the following statements is CORRECT?

Correct Answer
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A project's IRR is independent of the firm's cost of capital.In other words,a project's IRR doesn't change with a change in the firm's cost of capital.

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The internal rate of return is that discount rate that equates the present value of the cash outflows (or costs)with the present value of the cash inflows.

Correct Answer
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Which of the following statements is CORRECT?

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

Correct Answer
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Which of the following statements is CORRECT?

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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Suzanne's Cleaners is considering a project that has the following cash flow data.What is the project's payback? $\begin{array} { l c c c c c c } \text { Year } & 0 & 1 & 2 & 3 & 4 & 5 \\\text { Cash flowr } & - \$1,100 & \$300 & \$310 & \$320 & \$330 & \$340\end{array}$

Correct Answer
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Which of the following statements is CORRECT?

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Projects C and D both have normal cash flows and are mutually exclusive.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
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Exam 10: The Basics of Capital Budgeting: Evaluating Cash Flows

Which of the following statements is CORRECT?

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

Consider projects S and L.Both have normal cash flows,and the projects have the same risk,hence both are evaluated with the same WACC,10%.However,S has a higher IRR than L.Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

A project's IRR is independent of the firm's cost of capital.In other words,a project's IRR doesn't change with a change in the firm's cost of capital.

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The internal rate of return is that discount rate that equates the present value of the cash outflows (or costs)with the present value of the cash inflows.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

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

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Projects C and D both have normal cash flows and are mutually exclusive.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?

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