Question 1

Which of the following statements is CORRECT?

Accepted Answer

A)   The NPV,IRR,MIRR,and discounted payback (using a payback requirement of 3 years or less) methods always lead to the same accept/reject decisions for independent projects.
B)   For mutually exclusive projects with normal cash flows,the NPV and MIRR methods can never conflict,but their results could conflict with the discounted payback and the regular IRR methods.
C)   Multiple IRRs can exist,but not multiple MIRRs.This is one reason some people favor the MIRR over the regular IRR.
D)   If a firm uses the discounted payback method with a required payback of 4 years,then it will accept more projects than if it used a regular payback of 4 years.
E)   The percentage difference between the MIRR and the IRR is equal to the project's WACC.F) A) and B)
G) C) and D)

Question 2

Nast 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 higher MIRR rather than the one with the higher NPV,how much value will be forgone? Note that under some conditions choosing projects on the basis of the MIRR will cause $0.00 value to be lost.   WACC: 10.75%	ext { WACC: } \quad 10.75 \% WACC: 10.75% 
 01234CFS−$1,100$375$375$375$375CFL−$2,200$725$725$725$725\begin{array}{llllll}&0&1&2&3&4\\hline\mathrm{CF}_{\mathrm{S}} & -\$ 1,100 & \$ 375 & \$ 375 & \$ 375 & \$ 375 \\mathrm{CF}_{\mathrm{L}} & -\$ 2,200 & \$ 725 & \$ 725 & \$ 725 & \$ 725\end{array}CFS​CFL​​0−$1,100−$2,200​1$375$725​2$375$725​3$375$725​4$375$725​​

Accepted Answer

A)   $6.49
B)   $9.40
C)   $0.00
D)   $7.66
E)   $6.66 F) D) and E)
G) C) and E)

Question 3

Which of the following statements is CORRECT?

Accepted Answer

A)   The MIRR and NPV decision criteria can never conflict.
B)   The IRR method can never be subject to the multiple IRR problem,while the MIRR method can be.
C)   One reason some people prefer the MIRR to the regular IRR is that the MIRR is based on a generally more reasonable reinvestment rate assumption.
D)   The higher the WACC,the shorter the discounted payback period.
E)   The MIRR method assumes that cash flows are reinvested at the crossover rate.F) A) and C)
G) A) and E)

Question 4

Mansi Inc.is considering a project that has the following cash flow data.What is the project's payback?   Year 0123 Cash flows −$500$300$325$350\begin{array} { l c c c c } 	ext { Year } & 0 & 1 & 2 & 3 \\hline 	ext { Cash flows } & - \$ 500 & \$ 300 & \$ 325 & \$ 350\end{array} Year  Cash flows ​0−$500​1$300​2$325​3$350​​

Accepted Answer

A)   1.28 years
B)   1.58 years
C)   1.83 years
D)   1.62 years
E)   1.49 years F) C) and D)
G) A) 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 E)
G) C) and E)

Question 6

Which of the following statements is CORRECT?

Accepted Answer

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 WAC
C)  ,these two methods always rank mutually exclusive projects in the same order.F) A) and D)
G) B) and D)

Question 7

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

Question 8

Westchester Corp.is considering two equally risky,mutually exclusive projects,both of which have normal cash flows.Project A has an IRR of 11%,while Project B's IRR is 14%.When the WACC is 8%,the projects have the same NPV.Given this information,which of the following statements is CORRECT?

Accepted Answer

A)   If the WACC is 13%,Project A's NPV will be higher than Project B's.
B)   If the WACC is 9%,Project A's NPV will be higher than Project B's.
C)   If the WACC is 6%,Project B's NPV will be higher than Project A's.
D)   If the WACC is greater than 14%,Project A's IRR will exceed Project B's.
E)   If the WACC is 9%,Project B's NPV will be higher than Project A's.F) A) and B)
G) A) and E)

Question 9

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

Question 10

Fernando Designs 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 −$650$500$500$500\begin{array} { l c c c c } 	ext { WACC: } & { 10.00 \% } & & & \	ext { Year } & 0 & 1 & 2 & 3 \\hline  	ext { Cash flows } & - \$ 650 & \$ 500 & \$ 500 & \$ 500\end{array} WACC:  Year  Cash flows ​10.00%0−$650​1$500​2$500​3$500​​

Accepted Answer

A)   1.62 years
B)   1.58 years
C)   1.15 years
D)   1.47 years
E)   1.24 years F) A) and B)
G) None of the above

Question 11

Under certain conditions,a project may have more than one IRR.One such condition is when,in addition to the initial investment at time = 0,a negative cash flow (or cost)occurs at the end of the project's life.

Accepted Answer

A) True 
 B)False

Question 12

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

Question 13

Which of the following statements is CORRECT?

Accepted Answer

A)   For a project with normal cash flows,any change in the WACC will change both the NPV and the IRR.
B)   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.
C)   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.
D)   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.
E)   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.F) A) and C)
G) A) and B)

Question 14

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.   Year 0123 Cash flows −$1,050$450$470$490\begin{array} { l c c c c } 	ext { Year } & 0 & 1 & 2 & 3 \\hline  	ext { Cash flows } & - \$ 1,050 & \$ 450 & \$ 470 & \$ 490\end{array} Year  Cash flows ​0−$1,050​1$450​2$470​3$490​​ 
?

Accepted Answer

A)   12.69%
B)   13.98%
C)   15.58%
D)   18.15%
E)   16.07% F) A) and E)
G) C) and D)

Question 15

For a project with one initial cash outflow followed by a series of positive cash inflows,the modified IRR (MIRR)method involves compounding the cash inflows out to the end of the project's life,summing those compounded cash flows to form a terminal value (TV),and then finding the discount rate that causes the PV of the TV to equal the project's cost.

Accepted Answer

A) True 
 B)False

Question 16

Projects S and L are equally risky,mutually exclusive,and have normal cash flows.Project S has an IRR of 15%,while Project L's IRR is 12%.The two projects have the same NPV when the WACC is 7%.Which of the following statements is CORRECT?

Accepted Answer

A)   If the WACC is 10%,both projects will have positive NPVs.
B)   If the WACC is 6%,Project S will have the higher NPV.
C)   If the WACC is 13%,Project S will have the lower NPV.
D)   If the WACC is 10%,both projects will have a negative NPV.
E)   Project S's NPV is more sensitive to changes in WACC than Project L's.F) C) and D)
G) B) and D)

Question 17

Other things held constant,an increase in the cost of capital will result in a decrease in a project's IRR.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following statements is CORRECT?

Accepted Answer

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

Question 19

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.   Year 0123 Cash flows −$1,025$425$425$425\begin{array} { l c c c c } 	ext { Year } & 0 & 1 & 2 & 3 \\hline  	ext { Cash flows } & - \$ 1,025 & \$ 425 & \$ 425 & \$ 425\end{array} Year  Cash flows ​0−$1,025​1$425​2$425​3$425​​

Accepted Answer

A)   9.64%
B)   10.82%
C)   12.58%
D)   11.29%
E)   11.76% F) D) and E)
G) A) and B)

Question 20

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.   WACC: 10.00% Year 01234 Cash flows −$975$300$320$340$360\begin{array} { l c c c c c } 	ext { WACC: } & { 10.00 \% } \	ext { Year } & 0 & 1 & 2 & 3 & 4 \\hline  	ext { Cash flows } & - \$ 975 & \$ 300 & \$ 320 & \$ 340 & \$ 360\end{array} WACC:  Year  Cash flows ​10.00%0−$975​1$300​2$320​3$340​4$360​​

Accepted Answer

A)   14.45%
B)   12.92%
C)   12.57%
D)   11.28%
E)   11.75% F) None of the above
G) B) and D)

Exam 11: The Basics of Capital Budgeting

Projects S and L are equally risky,mutually exclusive,and have normal cash flows.Project S has an IRR of 15%,while Project L's IRR is 12%.The two projects have the same NPV when the WACC is 7%.Which of the following statements is CORRECT?

Correct Answer
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Westchester Corp.is considering two equally risky,mutually exclusive projects,both of which have normal cash flows.Project A has an IRR of 11%,while Project B's IRR is 14%.When the WACC is 8%,the projects have the same NPV.Given this information,which of the following statements is CORRECT?

Correct Answer
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Other things held constant,an increase in the cost of capital will result in a decrease in a project's IRR.

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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Which of the following statements is CORRECT?

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Which of the following statements is CORRECT?

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Which of the following statements is CORRECT?

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Mansi Inc.is considering a project that has the following cash flow data.What is the project's payback? $\begin{array} { l c c c c } \text { Year } & 0 & 1 & 2 & 3 \\\hline \text { Cash flows } & - \$ 500 & \$ 300 & \$ 325 & \$ 350\end{array}$

Correct Answer
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Under certain conditions,a project may have more than one IRR.One such condition is when,in addition to the initial investment at time = 0,a negative cash flow (or cost)occurs at the end of the project's life.

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Which of the following statements is CORRECT?

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Which of the following statements is CORRECT?

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Exam 11: The Basics of Capital Budgeting

Projects S and L are equally risky,mutually exclusive,and have normal cash flows.Project S has an IRR of 15%,while Project L's IRR is 12%.The two projects have the same NPV when the WACC is 7%.Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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Westchester Corp.is considering two equally risky,mutually exclusive projects,both of which have normal cash flows.Project A has an IRR of 11%,while Project B's IRR is 14%.When the WACC is 8%,the projects have the same NPV.Given this information,which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Other things held constant,an increase in the cost of capital will result in a decrease in a project's IRR.

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

Which of the following statements is CORRECT?

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Which of the following statements is CORRECT?

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Which of the following statements is CORRECT?

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Under certain conditions,a project may have more than one IRR.One such condition is when,in addition to the initial investment at time = 0,a negative cash flow (or cost)occurs at the end of the project's life.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

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Which of the following statements is CORRECT?

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