Question 1

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 2

If you were evaluating two mutually exclusive projects for a firm with a zero cost of capital, the payback method and NPV method would always lead to the same decision on which project to undertake.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following statements is CORRECT?

Accepted Answer

A)   One defect of the IRR method is that it does not take account of cash flows over a project's full life.
B)   One defect of the IRR method is that it does not take account of the time value of money.
C)   One defect of the IRR method is that it does not take account of the cost of capital.
D)   One defect of the IRR method is that it values a dollar received today the same as a dollar that will not be received until sometime in the future.
E)   One defect of the IRR method is that it assumes that the cash flows to be received from a project can be reinvested at the IRR itself, and that assumption is often not valid.F) A) and C)
G) B) and E)

Question 4

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 IRR.

Accepted Answer

A) True 
 B)False

Question 5

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 6

Assume a project has normal cash flows. All else equal, which of the following statements is CORRECT?

Accepted Answer

A)   A project's IRR increases as the WACC declines.
B)   A project's NPV increases as the WACC declines.
C)   A project's MIRR is unaffected by changes in the WACC.
D)   A project's regular payback increases as the WACC declines.
E)   A project's discounted payback increases as the WACC declines.F) B) and C)
G) A) and E)

Question 7

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

Question 8

You are considering two mutually exclusive, equally risky, projects. Both have IRRs that exceed the WACC. Which of the following statements is CORRECT? Assume that the projects have normal cash flows, with one outflow followed by a series of inflows.

Accepted Answer

A)   If the two projects' NPV profiles do not cross, then there will be a sharp conflict as to which one should be selected.
B)   If the cost of capital is greater than the crossover rate, then the IRR and the NPV criteria will not result in a conflict between the projects. One project will rank higher by both criteria.
C)   If the cost of capital is less than the crossover rate, then the IRR and the NPV criteria will not result in a conflict between the projects. One project will rank higher by both criteria.
D)   For a conflict to exist between NPV and IRR, the initial investment cost of one project must exceed the cost of the other.
E)   For a conflict to exist between NPV and IRR, one project must have an increasing stream of cash flows over time while the other has a decreasing stream. If both sets of cash flows are increasing or decreasing, then it would be impossible for a conflict to exist, even if one project is larger than the other.F) A) and D)
G) D) and E)

Question 9

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

Question 10

Which of the following statements is CORRECT?

Accepted Answer

A)   If a project has "normal" cash flows, then its IRR must be positive.
B)   If a project has "normal" cash flows, then its MIRR must be positive.
C)   If a project has "normal" cash flows, then it will have exactly two real IRRs.
D)   The definition of "normal" cash flows is that the cash flow stream has one or more negative cash flows followed by a stream of positive cash flows and then one negative cash flow at the end of the project's life.
E)   If a project has "normal" cash flows, then it can have only one real IRR, whereas a project with "nonnormal" cash flows might have more than one real IRR.F) C) and D)
G) A) and C)

Question 11

In theory, capital budgeting decisions should depend solely on forecasted cash flows and the opportunity cost of capital. The decision criterion should not be affected by managers' tastes, choice of accounting method, or the profitability of other independent projects.

Accepted Answer

A) True 
 B)False

Question 12

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

Exam 11: Capital Budgeting

If you were evaluating two mutually exclusive projects for a firm with a zero cost of capital, the payback method and NPV method would always lead to the same decision on which project to undertake.

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

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 IRR.

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

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
verified

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
verified

In theory, capital budgeting decisions should depend solely on forecasted cash flows and the opportunity cost of capital. The decision criterion should not be affected by managers' tastes, choice of accounting method, or the profitability of other independent projects.

Correct Answer
verified

You are considering two mutually exclusive, equally risky, projects. Both have IRRs that exceed the WACC. Which of the following statements is CORRECT? Assume that the projects have normal cash flows, with one outflow followed by a series of inflows.

Correct Answer
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?

Correct Answer
verified

Assume a project has normal cash flows. All else equal, which of the following statements is CORRECT?

Correct Answer
verified

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
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Exam 11: Capital Budgeting

If you were evaluating two mutually exclusive projects for a firm with a zero cost of capital, the payback method and NPV method would always lead to the same decision on which project to undertake.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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 IRR.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

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

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

In theory, capital budgeting decisions should depend solely on forecasted cash flows and the opportunity cost of capital. The decision criterion should not be affected by managers' tastes, choice of accounting method, or the profitability of other independent projects.

Correct AnswerverifiedShow Answer

You are considering two mutually exclusive, equally risky, projects. Both have IRRs that exceed the WACC. Which of the following statements is CORRECT? Assume that the projects have normal cash flows, with one outflow followed by a series of inflows.

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

Assume a project has normal cash flows. All else equal, which of the following statements is CORRECT?

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

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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