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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 projected NPV is negative, it should be rejected.


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

F) C) and D)
G) None of the above

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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.

A) True
B) False

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Datta Computer Systems 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.


A) 9.70%
B) 10.78%
C) 11.98%
D) 13.31%
E) 14.64%

F) B) and E)
G) None of the above

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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?


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

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Which of the following statements is CORRECT?


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) None of the above

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

A) True
B) False

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


A) 1.42 years
B) 1.58 years
C) 1.75 years
D) 1.93 years
E) 2.12 years

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

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Anderson Systems 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.


A) $265.65
B) $278.93
C) $292.88
D) $307.52
E) $322.90

F) A) and B)
G) All of the above

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Assume that the economy is enjoying a strong boom, and as a result interest rates and money costs generally are relatively high. The WACC for two mutually exclusive projects that are being considered is 12%. Project S has an IRR of 20% while Project L's IRR is 15%. The projects have the same NPV at the 12% current WACC. However, you believe that the economy will soon fall into a mild recession, and money costs and thus your WACC will soon decline. You also think that the projects will not be funded until the WACC as decreased, and their cash flows will not be affected by the change in economic conditions. Under these conditions, which of the following statement is CORRECT?


A) You should reject both projects because they will both have negative NPVs under the new conditions.
B) You should delay a decision until you have more information on the projects, even if this means that a competitor might come in and capture this market.
C) You should recommend Project L, because at the new WACC it will have the higher NPV.
D) You should recommend Project S, because at the new WACC it will have the higher NPV.
E) You should recommend Project L because it will have both a higher IRR and a higher NPV under the new conditions.

F) B) and C)
G) A) and B)

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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.


A) 14.08%
B) 15.65%
C) 17.21%
D) 18.94%
E) 20.83%

F) None of the above
G) A) and D)

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


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

F) B) and E)
G) None of the above

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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.

A) True
B) False

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Simms Corp. 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.


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

F) None of the above
G) A) and B)

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Last month, Lloyd's Systems analyzed the project whose cash flows are shown below. However, before the decision to accept or reject the project, the Federal Reserve took actions that 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 projected NPV can be negative, in which case it should be rejected.


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

F) B) and E)
G) D) and E)

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An increase in the firm's WACC will decrease projects' NPVs, which could change the accept/reject decision for any potential project. However, such a change would have no impact on projects' IRRs. Therefore, the accept/reject decision under the IRR method is independent of the cost of capital.

A) True
B) False

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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.


A) A project's regular IRR is found by compounding the cash inflows at the WACC to find the terminal value (TV) , then discounting this TV at the WACC.
B) A project's regular IRR is found by discounting the cash inflows at the WACC to find the present value (PV) , then compounding this PV to find the IRR.
C) If a project's IRR is greater than the WACC, then its NPV must be negative.
D) To find a project's IRR, we must solve for the discount rate that causes the PV of the inflows to equal the PV of the project's costs.
E) To find a project's IRR, we must find a discount rate that is equal to the WACC.

F) B) and C)
G) A) and B)

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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?


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) C) and D)
G) B) and C)

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Which of the following statements is CORRECT?


A) 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.
B) 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.
C) 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.
D) One advantage of the NPV over the MIRR method is that NPV discounts cash flows whereas the MIRR is based on undiscounted cash flows.
E) Since cash flows under the IRR and MIRR are both discounted at the same rate (the WACC) , these two methods always rank mutually exclusive projects in the same order.

F) D) and E)
G) B) and C)

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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.

A) True
B) False

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Lasik Vision Inc. recently analyzed the project whose cash flows are shown below. However, before Lasik decided to accept or reject the project, the Federal Reserve took actions that 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 projected NPV can be negative, in which case it should be rejected.


A) -$59.03
B) -$56.08
C) -$53.27
D) -$50.61
E) -$48.08

F) B) and D)
G) C) and D)

Correct Answer

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