Question 1

Four of the following statements are truly disadvantages of the regular payback method,but one is not a disadvantage of this method.Which one is NOT a disadvantage of the payback method?

Accepted Answer

A)   Lacks an objective,market-determined benchmark for making decisions.
B)   Ignores cash flows beyond the payback period.
C)   Does not directly account for the time value of money.
D)   Does not provide any indication regarding a project's liquidity or risk.
E)   Does not take account of differences in size among projects.F) A) and B)
G) B) and E)

Question 2

McCall Manufacturing has a WACC of 10%.The firm is considering two normal,equally risky,mutually exclusive,but not repeatable projects.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)   Each project must have a negative NPV.
B)   Since the projects are mutually exclusive,the firm should always select Project B.
C)   If the crossover rate is 8%,Project B will have the higher NPV.
D)   Only one project has a positive NPV.
E)   If the crossover rate is 8%,Project A will have the higher NPV.F) B) and E)
G) B) and D)

Question 3

Which of the following statements is CORRECT?

Accepted Answer

A)   The internal rate of return method (IRR) is generally regarded by academics as being the best single method for evaluating capital budgeting projects.
B)   The payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects.
C)   The discounted payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects.
D)   The net present value method (NPV) is generally regarded by academics as being the best single method for evaluating capital budgeting projects.
E)   The modified internal rate of return method (MIRR) is generally regarded by academics as being the best single method for evaluating capital budgeting projects.F) A) and D)
G) A) and C)

Question 4

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)   Project S must have a higher NPV than Project L.
B)   If Project S has a positive NPV,Project L must also have a positive NPV.
C)   If the WACC falls,each project's IRR will increase.
D)   If the WACC increases,each project's IRR will decrease.
E)   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.F) B) and D)
G) B) and E)

Question 5

Jazz World Inc.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.   WACC: 9.75% Year 01234 Cash flows −$1,200$400$425$450$475\begin{array} { l c c c c c } 	ext { WACC: } & 9.75 \% & & & & \	ext { Year } & 0 & 1 & 2 & 3 & 4 \\hline  	ext { Cash flows } & - \$ 1,200 & \$ 400 & \$ 425 & \$ 450 & \$ 475\end{array} WACC:  Year  Cash flows ​9.75%0−$1,200​1$400​2$425​3$450​4$475​​

Accepted Answer

A)   0$222.13
B)   0$185.11
C)   0$157.34
D)   0$174.00
E)   0$198.07 F) A) and B)
G) A) and C)

Question 6

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) C) and E)
G) A) and B)

Question 7

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 8

Susmel Inc.is considering a project that has the following cash flow data.What is the project's payback?   Year 0123 Cash flows −$475$150$200$300\begin{array} { l c c c c } 	ext { Year } & 0 & 1 & 2 & 3 \\hline 	ext { Cash flows } & - \$ 475 & \$ 150 & \$ 200 & \$ 300\end{array} Year  Cash flows ​0−$475​1$150​2$200​3$300​​

Accepted Answer

A)   2.42 years
B)   1.96 years
C)   2.88 years
D)   2.47 years
E)   2.85 years F) A) and D)
G) All of the above

Question 9

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 10

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

Question 11

Ehrmann Data Systems 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.   WACC: 9.00% Year 0123 Cash flows −$1,000$450$450$450\begin{array} { l c c c c } 	ext { WACC: } & 9.00 \% & & & \	ext { Year } & 0 & 1 & 2 & 3 \\hline 	ext { Cash flows } & - \$ 1,000 & \$ 450 & \$ 450 & \$ 450\end{array} WACC:  Year  Cash flows ​9.00%0−$1,000​1$450​2$450​3$450​​

Accepted Answer

A)   13.84%
B)   14.53%
C)   17.29%
D)   13.28%
E)   13.70% F) C) and D)
G) A) and C)

Question 12

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

Question 13

Because "present value" refers to the value of cash flows that occur at different points in time,a series of present values of cash flows should not be summed to determine the value of a capital budgeting project.

Accepted Answer

A) True 
 B)False

Question 14

The regular payback method is deficient in that it does not take account of cash flows beyond the payback period.The discounted payback method corrects this fault.

Accepted Answer

A) True 
 B)False

Question 15

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

Question 16

If the IRR of normal Project X is greater than the IRR of mutually exclusive (and also normal)Project Y,we can conclude that the firm should always select X rather than Y if X has NPV > 0.

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 outflow followed by a series of inflows.

Accepted Answer

A)   If Project A has a higher IRR than Project B,then Project A must have the lower NPV.
B)   If Project A has a higher IRR than Project B,then Project A must also have a higher NPV.
C)   The IRR calculation implicitly assumes that all cash flows are reinvested at the WACC.
D)   The IRR calculation implicitly assumes that cash flows are withdrawn from the business rather than being reinvested in the business.
E)   If a project has normal cash flows and its IRR exceeds its WACC,then the project's NPV must be positive.F) B) and E)
G) B) and C)

Question 18

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 E)
G) B) and C)

Question 19

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 20

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

Exam 11: The Basics of Capital Budgeting

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
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Four of the following statements are truly disadvantages of the regular payback method,but one is not a disadvantage of this method.Which one is NOT a disadvantage of the payback method?

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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Because "present value" refers to the value of cash flows that occur at different points in time,a series of present values of cash flows should not be summed to determine the value of a capital budgeting project.

Correct Answer
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Susmel Inc.is considering a project that has the following cash flow data.What is the project's payback? $\begin{array} { l c c c c } \text { Year } & 0 & 1 & 2 & 3 \\\hline \text { Cash flows } & - \$ 475 & \$ 150 & \$ 200 & \$ 300\end{array}$

Correct Answer
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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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Which of the following statements is CORRECT?

Correct Answer
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Correct Answer
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If the IRR of normal Project X is greater than the IRR of mutually exclusive (and also normal)Project Y,we can conclude that the firm should always select X rather than Y if X has NPV > 0.

Correct Answer
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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
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Which of the following statements is CORRECT?

Correct Answer
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The regular payback method is deficient in that it does not take account of cash flows beyond the payback period.The discounted payback method corrects this fault.

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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Which of the following statements is CORRECT?

Correct Answer
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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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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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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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Exam 11: The Basics of Capital Budgeting

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

Four of the following statements are truly disadvantages of the regular payback method,but one is not a disadvantage of this method.Which one is NOT a disadvantage of the payback method?

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

Because "present value" refers to the value of cash flows that occur at different points in time,a series of present values of cash flows should not be summed to determine the value of a capital budgeting project.

Correct AnswerverifiedShow Answer

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

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

If the IRR of normal Project X is greater than the IRR of mutually exclusive (and also normal)Project Y,we can conclude that the firm should always select X rather than Y if X has NPV > 0.

Correct AnswerverifiedShow Answer

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

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

The regular payback method is deficient in that it does not take account of cash flows beyond the payback period.The discounted payback method corrects this fault.

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

Which of the following statements is CORRECT?

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

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

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

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