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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.

A) True
B) False

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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.

A) True
B) False

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Assuming that their NPVs based on the firm's cost of capital are equal, the NPV of a project whose cash flows accrue relatively rapidly will be more sensitive to changes in the discount rate than the NPV of a project whose cash flows come in later in its life.

A) True
B) False

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Spence Company is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's IRR can be less than the cost of capital or negative, in both cases it will be rejected. Spence Company is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's IRR can be less than the cost of capital or negative, in both cases it will be rejected. A) 14.05% B) 15.61% C) 17.34% D) 19.27% E) 21.20%


A) 14.05%
B) 15.61%
C) 17.34%
D) 19.27%
E) 21.20%

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

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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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False

Consider projects S and L. Both have normal cash flows, and the projects have the same risk, hence both are evaluated with the same cost of capital, 10%. However, S has a higher IRR than L. Which of the following statements is CORRECT?


A) If Project S has a positive NPV, Project L must also have a positive NPV.
B) If the cost of capital falls, each project's IRR will increase.
C) If the cost of capital increases, each project's IRR will decrease.
D) If Projects S and L have the same NPV at the current cost of capital, 10%, then Project L, the one with the lower IRR, would have a higher NPV if the cost of capital used to evaluate the projects declined.
E) Project S must have a higher NPV than Project L.

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

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Which of the following statements is CORRECT?


A) If the cost of capital declines, this lowers a project's NPV.
B) 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.
C) A project's NPV depends on the total amount of cash flows the project produces, but because the cash flows are discounted at the cost of capital, it does not matter if the cash flows occur early or late in the project's life.
D) 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.
E) 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.

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

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An increase in the firm's cost of capital 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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The IRR of normal Project X is greater than the IRR of normal Project Y, and both IRRs are greater than zero. Also, the NPV of X is greater than the NPV of Y at the cost of capital. If the two projects are mutually exclusive, Project X should definitely be selected, and the investment made, provided we have confidence in the data. Put another way, it is impossible to draw NPV profiles that would suggest not accepting Project X.

A) True
B) False

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Which of the following statements is CORRECT?


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

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

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A

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


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

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

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Markman & Sons is considering Projects S and L. These projects are mutually exclusive, equally risky, and not repeatable and their cash flows are shown below. 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 project with the higher IRR will also have the higher NPV, i.e., no conflict will exist. Markman & Sons is considering Projects S and L. These projects are mutually exclusive, equally risky, and not repeatable and their cash flows are shown below. 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 project with the higher IRR will also have the higher NPV, i.e., no conflict will exist. A) $5.47 B) $6.02 C) $6.62 D) $7.29 E) $7.82


A) $5.47
B) $6.02
C) $6.62
D) $7.29
E) $7.82

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

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Clifford Company is choosing between two projects. The larger project has an initial cost of $100,000, annual cash flows of $30,000 for 5 years, and an IRR of 15.24%. The smaller project has an initial cost of $50,000, annual cash flows of $16,000 for 5 years, and an IRR of 16.63%. The projects are equally risky. Which of the following statements is CORRECT?


A) Since the smaller project has the higher IRR, the two projects' NPV profiles will cross, and the larger project will look better based on the NPV at all positive values of the cost of capital.
B) If the company uses the NPV method, it will tend to favor smaller, shorter-term projects over larger, longer-term projects, regardless of how high or low the cost of capital is.
C) Since the smaller project has the higher IRR but the larger project has the higher NPV at a zero discount rate, the two projects' NPV profiles will cross, and the larger project will have the higher NPV if the cost of capital is less than the crossover rate.
D) Since the smaller project has the higher IRR and the larger NPV at a zero discount rate, the two projects' NPV profiles will cross, and the smaller project will look better if the cost of capital is less than the crossover rate.
E) Since the smaller project has the higher IRR, the two projects' NPV profiles cannot cross, and the smaller project's NPV will be higher at all positive values of the cost of capital.

F) C) and E)
G) All of the above

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Scott Enterprises is considering a project that has the following cash flow and cost of capital (r) data. What is the project's NPV? Note that if a project's expected NPV is negative, it should be rejected. Scott Enterprises is considering a project that has the following cash flow and cost of capital (r) data. What is the project's NPV? Note that if a project's expected NPV is negative, it should be rejected. A) $77.49 B) $81.56 C) $85.86 D) $90.15 E) $94.66


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

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

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C

Computer Consultants Inc. is considering a project that has the following cash flow and cost of capital (r) data. What is the project's MIRR? Note that a project's MIRR can be less than the cost of capital (and even negative) , in which case it will be rejected. Computer Consultants Inc. is considering a project that has the following cash flow and cost of capital (r) data. What is the project's MIRR? Note that a project's MIRR can be less than the cost of capital (and even negative) , in which case it will be rejected. A) 9.32% B) 10.35% C) 11.50% D) 12.78% E) 14.20%


A) 9.32%
B) 10.35%
C) 11.50%
D) 12.78%
E) 14.20%

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

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Which of the following statements is NOT a disadvantage of the regular payback method?


A) Ignores cash flows beyond the payback period.
B) Does not directly account for the time value of money.
C) Does not provide any indication regarding a project's liquidity or risk.
D) Does not take account of differences in size among projects.
E) Lacks an objective, market-determined benchmark for making decisions.

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

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McGlothin Inc. is considering a project that has the following cash flow data. What is the project's payback? McGlothin Inc. is considering a project that has the following cash flow data. What is the project's payback? A) 1.86 years B) 2.07 years C) 2.30 years D) 2.53 years E) 2.78 years


A) 1.86 years
B) 2.07 years
C) 2.30 years
D) 2.53 years
E) 2.78 years

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

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Patterson Co. is considering a project that has the following cash flow and cost of capital (r) data. What is the project's NPV? Note that a project's expected NPV can be negative, in which case it will be rejected. Patterson Co. is considering a project that has the following cash flow and cost of capital (r) data. What is the project's NPV? Note that a project's expected NPV can be negative, in which case it will be rejected. A) $54.62 B) $57.49 C) $60.52 D) $63.54 E) $66.72


A) $54.62
B) $57.49
C) $60.52
D) $63.54
E) $66.72

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

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Which of the following statements is CORRECT?


A) 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.
B) Multiple IRRs can exist, but not multiple MIRRs. This is one reason some people favor the MIRR over the regular IRR.
C) 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.
D) The percentage difference between the MIRR and the IRR is equal to the project's cost of capital.
E) 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.

F) None of the above
G) All of the above

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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) The higher the cost of capital used to calculate the NPV, the lower the calculated NPV will be.
B) If a project's NPV is greater than zero, then its IRR must be less than the cost of capital.
C) If a project's NPV is greater than zero, then its IRR must be less than zero.
D) The NPVs of relatively risky projects should be found using relatively low costs of capital.
E) A project's NPV is generally found by compounding the cash inflows at the cost of capital to find the terminal value (TV) , then discounting the TV at the IRR to find its PV.

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

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