Filters
Question type
Study Flashcards

Small businesses make less use of DCF capital budgeting techniques than large businesses. This may reflect a lack of knowledge on the part of small firms' managers, but it may also reflect a rational conclusion that the costs of using DCF analysis outweigh the benefits of these methods for very small firms.

A) True
B) False

Correct Answer

verifed

verified

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.

A) True
B) False

Correct Answer

verifed

verified

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?


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 B)
G) B) and E)

Correct Answer

verifed

verified

Sexton 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 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 one with the higher IRR will also have the higher NPV, so no value will be lost if the IRR method is used.


A) $134.79
B) $141.89
C) $149.36
D) $164.29
E) $205.36

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

Correct Answer

verifed

verified

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.


A) $41.25
B) $45.84
C) $50.93
D) $56.59
E) $62.88

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

Correct Answer

verifed

verified

A firm is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. The CEO wants to use the IRR criterion, while the CFO favors the NPV method. You were hired to advise the firm on the best procedure. If the wrong decision criterion is used, how much potential value would the firm lose?


A) $188.68
B) $198.61
C) $209.07
D) $219.52
E) $230.49

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

Correct Answer

verifed

verified

C

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

Correct Answer

verifed

verified

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.

A) True
B) False

Correct Answer

verifed

verified

Fernando Designs is considering a project that has the following cash flow and WACC data. What is the project's discounted payback?


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

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

Correct Answer

verifed

verified

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 NPV is found by compounding the cash inflows at the IRR to find the terminal value (TV) , then discounting the TV at the WACC.
B) The lower the WACC used to calculate it, the lower the calculated NPV will be.
C) If a project's NPV is less than zero, then its IRR must be less than the WACC.
D) If a project's NPV is greater than zero, then its IRR must be less than zero.
E) The NPV of a relatively low-risk project should be found using a relatively high WACC.

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

Correct Answer

verifed

verified

C

Ingram Electric Products 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) 8.86%
B) 9.84%
C) 10.94%
D) 12.15%
E) 13.50%

F) A) and C)
G) C) and D)

Correct Answer

verifed

verified

E

Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one cash outflow at t = 0 followed by a series of positive cash flows.


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 its MIRR will be greater than the IRR.
D) To find a project's MIRR, we compound cash inflows at the regular IRR and then find the discount rate that causes the PV of the terminal value to equal the initial cost.
E) To find a project's MIRR, the textbook procedure compounds cash inflows at the WACC and then finds the discount rate that causes the PV of the terminal value to equal the initial cost.

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

Correct Answer

verifed

verified

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

Correct Answer

verifed

verified

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

Correct Answer

verifed

verified

Yonan 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 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.


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

F) C) and D)
G) A) and D)

Correct Answer

verifed

verified

A conflict will exist between the NPV and IRR methods, when used to evaluate two equally risky but mutually exclusive projects, if the projects' cost of capital is less than the rate at which the projects' NPV profiles cross.

A) True
B) False

Correct Answer

verifed

verified

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

Correct Answer

verifed

verified

Which of the following statements is CORRECT?


A) The shorter a project's payback period, the less desirable the project is normally considered to be by this criterion.
B) One drawback of the payback criterion is that this method does not take account of cash flows beyond the payback period.
C) If a project's payback is positive, then the project should be accepted because it must have a positive NPV.
D) The regular payback ignores cash flows beyond the payback period, but the discounted payback method overcomes this problem.
E) One drawback of the discounted payback is that this method does not consider the time value of money, while the regular payback overcomes this drawback.

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

Correct Answer

verifed

verified

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

A) True
B) False

Correct Answer

verifed

verified

Which of the following statements is CORRECT?


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) None of the above

Correct Answer

verifed

verified

Showing 1 - 20 of 107

Related Exams

Exam 1

Overview

65 Questions

Exam 2

Financial Markets

33 Questions

Exam 3

Financial Statements

129 Questions

Exam 4

Statement Analysis

127 Questions

Exam 5

Time Value of Money

164 Questions

Exam 6

Forecasting

39 Questions

Exam 7

Interest Rates

82 Questions

Exam 8

Risk and Return

147 Questions

Exam 9

Bonds

92 Questions

Exam 10

Stocks

82 Questions

Exam 11

Cost of Capital

92 Questions

Exam 13

Cash Flow and Risk

78 Questions

Exam 14

Real Options

41 Questions

Exam 15

Capital Structure

88 Questions

Exam 16

Dividends

75 Questions

Exam 17

Working Capital

127 Questions

Exam 18

Derivatives

35 Questions

Exam 19

Multinational

50 Questions

Exam 20

Hybrid Financing

60 Questions

Exam 21

Mergers

39 Questions

Show Answer