Question 1

Langton Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. The CEO believes the IRR is the best selection criterion, while the CFO advocates the MIRR. If the decision is made by choosing the project with the higher IRR rather than the one with the higher MIRR, how much, if any, value will be forgone. In other words, what's the NPV of the chosen project versus the maximum possible NPV? Note that (1)  "true value" is measured by NPV, and (2)  under some conditions the choice of IRR vs. MIRR will have no effect on the value lost.

Accepted Answer

A)   $185.90
B)   $197.01
C)   $208.11
D)   $219.22
E)   $230.32F) C) and E)
G) C) and D)

Question 2

Which of the following statements is CORRECT?

Accepted Answer

A)   The NPV profile graph for a normal project will generally have a positive (upward)  slope as the life of the project increases.
B)   An NPV profile graph is designed to give decision makers an idea about how a project's risk varies with its life.
C)   An NPV profile graph is designed to give decision makers an idea about how a project's contribution to the firm's value varies with the cost of capital.
D)   We cannot draw a project's NPV profile unless we know the appropriate cost of capital for use in evaluating the project's NPV.
E)   An NPV profile graph shows how a project's payback varies as the cost of capital changes.F) None of the above
G) C) and D)

Question 3

A basic rule in capital budgeting is that if a project's NPV exceeds its IRR, then the project should be accepted.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following statements is CORRECT?

Accepted Answer

A)   If a project has "normal" cash flows, then its MIRR must be positive.
B)   If a project has "normal" cash flows, then it will have exactly two real IRRs.
C)   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.
D)   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.
E)   If a project has "normal" cash flows, then its IRR must be positive.F) A) and B)
G) D) and E)

Question 5

Farmer Co. 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.

Accepted Answer

A)   $24.14
B)   $26.82
C)   $29.80
D)   $33.11
E)   $36.42F) All of the above
G) A) and B)

Question 6

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.

Accepted Answer

A)   A project's MIRR is always less than its regular IRR.
B)   If a project's IRR is greater than its cost of capital, then its MIRR will be greater than the IRR.
C)   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.
D)   To find a project's MIRR, the textbook procedure compounds cash inflows at the cost of capital and then finds the discount rate that causes the PV of the terminal value to equal the initial cost.
E)   A project's MIRR is always greater than its regular IRR.F) C) and D)
G) C) and E)

Question 7

Dickson 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.

Accepted Answer

A)   $250.15
B)   $277.94
C)   $305.73
D)   $336.31
E)   $369.94F) A) and B)
G) All of the above

Question 8

Hart Corp. 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.

Accepted Answer

A)   12.55%
B)   13.21%
C)   13.87%
D)   14.56%
E)   15.29%F) B) and E)
G) A) and B)

Question 9

You are on the staff of O'Hara Inc. The CFO believes project acceptance should be based on the NPV, but Andrew O'Hara, the president, insists that no project should be accepted unless its IRR exceeds the project's risk-adjusted cost of capital. 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 cost of capital 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%, 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, although its NPV is positive, it has an IRR that is less than the cost of capital.
B)   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 cost of capital. You should explain this to the president and tell him that the firm's value will increase if the project is accepted.
C)   You should recommend that the project be rejected. Although its NPV is positive it has two IRRs, one of which is less than the cost of capital, which indicates that the firm's value will decline if the project is accepted.
D)   You should recommend that the project be rejected because, although its NPV is positive, its MIRR is less than the cost of capital, and that indicates that the firm's value will decline if it is accepted.
E)   You should recommend that the project be rejected because its NPV is negative and its IRR is less than the cost of capital.F) B) and C)
G) A) and E)

Question 10

Projects S and L, whose cash flows are shown below, are mutually exclusive, equally risky, and not repeatable. Hooper Inc. is considering which of these two projects to undertake. 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, so no value will be lost if the IRR method is used.

Accepted Answer

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

Question 11

Which of the following statements is CORRECT?

Accepted Answer

A)   Projects with "normal" cash flows can have two or more real IRRs.
B)   Projects with "normal" cash flows must have two changes in the sign of the cash flows, e.g., from negative to positive to negative. If there are more than two sign changes, then the cash flow stream is "nonnormal."
C)   The "multiple IRR problem" can arise if a project's cash flows are "normal."
D)   Projects with "nonnormal" cash flows are almost never encountered in the real world.
E)   Projects with "normal" cash flows can have only one real IRR.F) C) and E)
G) B) and E)

Question 12

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 13

The NPV method's assumption that cash inflows are reinvested at the cost of capital is generally more reasonable than the IRR's assumption that cash flows are reinvested at the IRR. This is an important reason why the NPV method is generally preferred over the IRR method.

Accepted Answer

A) True 
 B)False

Question 14

Kiley Electronics 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 (and even negative) , in which case it will be rejected.

Accepted Answer

A)   9.70%
B)   10.78%
C)   11.98%
D)   13.31%
E)   14.64%F) All of the above
G) B) and E)

Question 15

You are considering two mutually exclusive, equally risky, projects. Both have IRRs that exceed the cost of capital. 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 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. The same project will rank higher by both criteria.
B)   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. The same project will rank higher by both criteria.
C)   For a conflict to exist between NPV and IRR, the initial investment cost of one project must exceed the cost of the other.
D)   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.
E)   If the two projects' NPV profiles do not cross, then there will be a sharp conflict as to which one should be selected.F) A) and E)
G) B) and E)

Question 16

Which of the following statements is CORRECT?

Accepted Answer

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 cost of capital.
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.F) All of the above
G) C) and D)

Question 17

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.

Accepted Answer

A) True 
 B)False

Question 18

No 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 exceeds the rate at which the projects' NPV profiles cross.

Accepted Answer

A) True 
 B)False

Question 19

The NPV and IRR methods, when used to evaluate two independent and equally risky projects, will lead to different accept/reject decisions and thus capital budgets if the projects' IRRs are greater than their cost of capital.

Accepted Answer

A) True 
 B)False

Question 20

Lancaster 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 cost of capital is 8%, the projects have the same NPV. Given this information, which of the following statements is CORRECT?

Accepted Answer

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

Exam 10: The Basics of Capital Budgeting: Evaluating Cash Flows

Hart Corp. 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.

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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The NPV and IRR methods, when used to evaluate two independent and equally risky projects, will lead to different accept/reject decisions and thus capital budgets if the projects' IRRs are greater than their cost of capital.

Correct Answer
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Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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A basic rule in capital budgeting is that if a project's NPV exceeds its IRR, then the project should be accepted.

Correct Answer
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Correct Answer
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Correct Answer
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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.

Correct Answer
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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.

Correct Answer
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Correct Answer
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The NPV method's assumption that cash inflows are reinvested at the cost of capital is generally more reasonable than the IRR's assumption that cash flows are reinvested at the IRR. This is an important reason why the NPV method is generally preferred over the IRR method.

Correct Answer
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Correct Answer
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Dickson 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.

Correct Answer
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No 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 exceeds the rate at which the projects' NPV profiles cross.

Correct Answer
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Kiley Electronics 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 (and even negative) , in which case it will be rejected.

Correct Answer
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You are considering two mutually exclusive, equally risky, projects. Both have IRRs that exceed the cost of capital. 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
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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
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Which of the following statements is CORRECT?

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Exam 10: The Basics of Capital Budgeting: Evaluating Cash Flows

Hart Corp. 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.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

The NPV and IRR methods, when used to evaluate two independent and equally risky projects, will lead to different accept/reject decisions and thus capital budgets if the projects' IRRs are greater than their cost of capital.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

A basic rule in capital budgeting is that if a project's NPV exceeds its IRR, then the project should be accepted.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The NPV method's assumption that cash inflows are reinvested at the cost of capital is generally more reasonable than the IRR's assumption that cash flows are reinvested at the IRR. This is an important reason why the NPV method is generally preferred over the IRR method.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Dickson 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.

Correct AnswerverifiedShow Answer

No 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 exceeds the rate at which the projects' NPV profiles cross.

Correct AnswerverifiedShow Answer

Kiley Electronics 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 (and even negative) , in which case it will be rejected.

Correct AnswerverifiedShow Answer

You are considering two mutually exclusive, equally risky, projects. Both have IRRs that exceed the cost of capital. 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

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

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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