B) False
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A) 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.
B) 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.
C) One advantage of the NPV over the MIRR method is that NPV discounts cash flows whereas the MIRR is based on undiscounted cash flows.
D) 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.
E) 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.
G) B) and E)
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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.
G) A) and E)
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E
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A) Since the projects are mutually exclusive, the firm should always select Project B.
B) If the crossover rate is 8%, Project B will have the higher NPV.
C) Only one project has a positive NPV.
D) If the crossover rate is 8%, Project A will have the higher NPV.
E) Each project must have a negative NPV.
G) A) and C)
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B
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B) False
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A) One defect of the IRR method is that it does not take account of the time value of money.
B) One defect of the IRR method is that it does not take account of the cost of capital.
C) 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.
D) 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.
E) One defect of the IRR method is that it does not take account of cash flows over a project's full life.
G) B) and E)
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A) The discounted payback method recognizes all cash flows over a project's life, and it also adjusts these cash flows to account for the time value of money.
B) The regular payback method was, years ago, widely used, but virtually no companies even calculate the payback today.
C) The regular payback is useful as an indicator of a project's liquidity because it gives managers an idea of how long it will take to recover the funds invested in a project.
D) The regular payback does not consider cash flows beyond the payback year, but the discounted payback overcomes this defect.
E) The regular payback method recognizes all cash flows over a project's life.
G) A) and E)
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B) False
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A) $185.90
B) $197.01
C) $208.11
D) $219.22
E) $230.32
G) None of the above
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A) A project's MIRR is always less than its regular IRR.
B) If a project's IRR is greater than its WACC, then the MIRR will be less than the IRR.
C) If a project's IRR is greater than its WACC, then the MIRR will be greater than the IRR.
D) To find a project's MIRR, we compound cash inflows at the IRR and then discount the terminal value back to t = 0 at the WACC.
E) A project's MIRR is always greater than its regular IRR.
G) B) and E)
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A) 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.
B) If a project's IRR is greater than the WACC, then its NPV must be negative.
C) 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.
D) To find a project's IRR, we must find a discount rate that is equal to the WACC.
E) 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.
G) D) and E)
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A) Project L.
B) Both projects are equally sensitive to changes in the WACC since their NPVs are equal at all costs of capital.
C) Neither project is sensitive to changes in the discount rate, since both have NPV profiles that are horizontal.
D) The solution cannot be determined because the problem gives us no information that can be used to determine the projects' relative IRRs.
E) Project S.
G) B) and C)
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A) If a project's IRR is equal to its WACC, then under all reasonable conditions, the project's IRR must be negative.
B) If a project's IRR is equal to its WACC, then under all reasonable conditions the project's NPV must be zero.
C) There is no necessary relationship between a project's IRR, its WACC, and its NPV.
D) 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.
E) If a project's IRR is equal to its WACC, then, under all reasonable conditions, the project's NPV must be negative.
G) C) and D)
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A) $188.68
B) $198.61
C) $209.07
D) $219.52
E) $230.49
G) B) and C)
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A) 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.
B) You should recommend Project R, because at the new WACC it will have the higher NPV.
C) You should recommend Project K, because at the new WACC it will have the higher NPV.
D) You should recommend Project K because it has the higher IRR and will continue to have the higher IRR even at the new WACC.
E) You should reject both projects because they will both have negative NPVs under the new conditions.
G) A) and B)
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C
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B) False
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A) 1.88 years
B) 2.09 years
C) 2.29 years
D) 2.52 years
E) 2.78 years
G) All of the above
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A) $134.79
B) $141.89
C) $149.36
D) $164.29
E) $205.36
G) A) and E)
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A) A project's NPV increases as the WACC declines.
B) A project's MIRR is unaffected by changes in the WACC.
C) A project's regular payback increases as the WACC declines.
D) A project's discounted payback increases as the WACC declines.
E) A project's IRR increases as the WACC declines.
G) A) and C)
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A) 1.91 years
B) 2.12 years
C) 2.36 years
D) 2.59 years
E) 2.85 years
G) C) and D)
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