Question 1

Computer Consultants 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.   WACC: 10.00% Year 0123 Cash flows −$1,000$450$450$450\begin{array}{lcccc}	ext { WACC: } & 10.00 \% \	ext { Year } & 0 & 1 & 2 & 3 \	ext { Cash flows } & -\$ 1,000 & \$ 450 & \$ 450 & \$ 450\end{array} WACC:  Year  Cash flows ​10.00%0−$1,000​1$450​2$450​3$450​

Accepted Answer

A)   9.32%
B)   10.35%
C)   11.50%
D)   12.78%
E)   14.20% F) A) and E)
G) A) and C)

Question 2

Craig's Car Wash Inc.is considering a project that has the following cash flow and WACC data.What is the project's discounted payback?   WACC: 10.00% Year 0123 Cash flows −$900$500$500$500\begin{array}{lcccc}	ext { WACC: } & 10.00 \% \	ext { Year } & 0 & 1 & 2 & 3 \ 	ext { Cash flows } & -\$ 900 & \$ 500 & \$ 500 & \$ 500\end{array} WACC:  Year  Cash flows ​10.00%0−$900​1$500​2$500​3$500​

Accepted Answer

A)   1.88 years
B)   2.09 years
C)   2.29 years
D)   2.52 years
E)   2.78 years F) A) and E)
G) B) and D)

Question 3

Which of the following statements is CORRECT?

Accepted Answer

A)   The discounted payback method eliminates all of the problems associated with the payback method.
B)   When evaluating independent projects, the NPV and IRR methods often yield conflicting results regarding a project's acceptability.
C)   To find the MIRR, we discount the TV at the IRR.
D)   A project's NPV profile must intersect the X-axis at the project's WACC.
E)   The IRR method appeals to some managers because it gives an estimate of the rate of return on projects rather than a dollar amount, which the NPV method provides.F) A) and B)
G) None of the above

Question 4

Consider two projects,X and Y.Project X's IRR is 19% and Project Y's IRR is 17%.The projects have the same risk and the same lives,and each has constant cash flows during each year of their lives.If the WACC is 10%,Project Y has a higher NPV than X.Given this information,which of the following statements is CORRECT?

Accepted Answer

A)   The crossover rate must be greater than 10%.
B)   If the WACC is 8%, Project X will have the higher NPV.
C)   If the WACC is 18%, Project Y will have the higher NPV.
D)   Project X is larger in the sense that it has the higher initial cost.
E)   The crossover rate must be less than 10%.F) A) and C)
G) All of the above

Question 5

A firm should never accept a project if its acceptance would lead to an increase in the firm's cost of capital (its WACC).

Accepted Answer

A) True 
 B)False

Question 6

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 NPV.

Accepted Answer

A) True 
 B)False

Question 7

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 8

Last month,Standard 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. 
  Old WACC: 10.00% New WACC: 11.25% Year 0123 Cash flows −$1,000$410$410$410\begin{array} { l c c c c } 	ext { Old WACC: } & 10.00 \% & 	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 ​10.00%0−$1,000​ New WACC: 1$410​11.25%2$410​3$410​

Accepted Answer

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

Question 9

The NPV 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 10

Projects A and B have identical expected lives and identical initial cash outflows (costs) .However,most of one project's cash flows come in the early years,while most of the other project's cash flows occur in the later years.The two NPV profiles are given below: 
Which of the following statements is CORRECT?

Accepted Answer

A)   More of Project B's cash flows occur in the later years.
B)   We must have information on the cost of capital in order to determine which project has the larger early cash flows.
C)   The NPV profile graph is inconsistent with the statement made in the problem.
D)   The crossover rate, i.e., the rate at which Projects A and B have the same NPV, is greater than either project's IRR.
E)   More of Project A's cash flows occur in the later years.F) All of the above
G) A) and C)

Question 11

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 12

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 long-term projects and reject too many short-term projects (as judged by the NPV) .
B)   The firm will accept too many projects in all economic states because a 4-year payback is too low.
C)   The firm will accept too few projects in all economic states because a 4-year payback is too high.
D)   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.
E)   It will accept too many short-term projects and reject too many long-term projects (as judged by the NPV) .F) None of the above
G) A) and B)

Question 13

Normal Projects S and L have the same NPV when the discount rate is zero.However,Project S's cash flows come in faster than those of L.Therefore,we know that at any discount rate greater than zero,L will have the higher NPV.

Accepted Answer

A) True 
 B)False

Question 14

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

Question 15

Clifford 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 $50,000,annual cash flows of $16,000 for 5 years,and an IRR of 16.63%.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 will cross, and the larger project will look better based on the NPV at all positive values of WACC.
B)   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.
C)   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.
D)   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.
E)   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.F) B) and D)
G) None of the above

Question 16

Which of the following statements is CORRECT?

Accepted Answer

A)   If Project A's IRR exceeds Project B's, then A must have the higher NPV.
B)   A project's MIRR can never exceed its IRR.
C)   If a project with normal cash flows has an IRR less than the WACC, the project must have a positive NPV.
D)   If the NPV is negative, the IRR must also be negative.
E)   If a project with normal cash flows has an IRR greater than the WACC, the project must also have a positive NPV.F) B) and D)
G) A) and D)

Question 17

Farmer Co.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.   WACC: 10.25% Year 01234CFS−$950$500$800$0$0CFL−$2.100$400$800$800$1.000\begin{array}{lccccc}	ext { WACC: } & 10.25 \%\	ext { Year } & 0 & 1 & 2 & 3 & 4 \\mathrm{CF}_{\mathrm{S}} & -\$ 950 & \$ 500 & \$ 800 & \$ 0 & \$ 0\\mathrm{CF}_{\mathrm{L}} & -\$ 2.100 & \$ 400 & \$ 800 & \$ 800 & \$ 1.000\end{array} WACC:  Year CFS​CFL​​10.25%0−$950−$2.100​1$500$400​2$800$800​3$0$800​4$0$1.000​

Accepted Answer

A)   $24.14
B)   $26.82
C)   $29.80
D)   $33.11
E)   $36.42 F) A) and B)
G) B) and D)

Question 18

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 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

Markman & Sons is considering Projects S and L.These projects are mutually exclusive,equally risky,and not repeatable and their cash flows are shown below.If the decision is made by choosing the project with the higher IRR,how much value will be forgone? Note that under certain conditions choosing projects on the basis of the IRR will not cause any value to be lost because the project with the higher IRR will also have the higher NPV,i.e.,no conflict will exist.   WACC: 10.00% Year: 01234 CFS −$1,025$650$450$250$50 CFL −$1,025$100$300$500$700\begin{array} { l c c c c c } 	ext { WACC: } & 10.00 \% \	ext { Year: }&0& 1 & 2 & 3 & 4 \\hline 	ext { CFS }& -\$ 1,025 & \$ 650 & \$ 450 & \$ 250 & \$ 50 \	ext { CFL }& - \$ 1,025 & \$ 100 & \$ 300 & \$ 500 & \$ 700\end{array} WACC:  Year:  CFS  CFL ​10.00%0−$1,025−$1,025​1$650$100​2$450$300​3$250$500​4$50$700​​

Accepted Answer

A)   $5.47
B)   $6.02
C)   $6.62
D)   $7.29
E)   $7.82 F) A) and B)
G) C) and D)

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

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 NPV.

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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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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The NPV 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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A firm should never accept a project if its acceptance would lead to an increase in the firm's cost of capital (its WACC).

Correct Answer
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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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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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Which of the following statements is CORRECT?

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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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
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Normal Projects S and L have the same NPV when the discount rate is zero.However,Project S's cash flows come in faster than those of L.Therefore,we know that at any discount rate greater than zero,L will have the higher NPV.

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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Craig's Car Wash Inc.is considering a project that has the following cash flow and WACC data.What is the project's discounted payback? $\begin{array}{lcccc}\text { WACC: } & 10.00 \% \\\text { Year } & 0 & 1 & 2 & 3 \\ \text { Cash flows } & -\$ 900 & \$ 500 & \$ 500 & \$ 500\end{array}$

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

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 NPV.

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

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

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

Correct AnswerverifiedShow Answer

A firm should never accept a project if its acceptance would lead to an increase in the firm's cost of capital (its WACC).

Correct AnswerverifiedShow Answer

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

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

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

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

Normal Projects S and L have the same NPV when the discount rate is zero.However,Project S's cash flows come in faster than those of L.Therefore,we know that at any discount rate greater than zero,L will have the higher NPV.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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Correct AnswerverifiedShow Answer

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