Question 1

If the IRR of normal Project X is greater than the IRR of mutually exclusive Project Y (also normal), we can conclude that the firm should select X rather than Y if X has NPV > 0.

Accepted Answer

A) True 
 B)False

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

The phenomenon called "multiple internal rates of return" arises when two or more mutually exclusive projects that have different lives are being compared.

Accepted Answer

A) True 
 B)False

Question 4

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?

Accepted Answer

A)   More of Project A's cash flows occur in the later years.
B)   More of Project B's cash flows occur in the later years.
C)   We must have information on the cost of capital in order to determine which project has the larger early cash flows.
D)   The NPV profile graph is inconsistent with the statement made in the problem.E) None of the above
F) A) and B) A

Question 5

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.

Accepted Answer

A)   The higher the WACC 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 WACC.
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 WACCs.E) B) and C)
F) B) and D)

Question 6

Other things held constant, an increase in the cost of capital will result in a decrease in a project's IRR.

Accepted Answer

A) True 
 B)False

Question 7

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.

Accepted Answer

A)   The longer a project's payback period, the more desirable the project is normally considered to be by this criterion.
B)   One drawback of the payback criterion for evaluating projects is that this method does not properly account for the time value of money.
C)   If a project's payback is positive, then the project should be rejected because it must have a negative NPV.
D)   The regular payback ignores cash flows beyond the payback period, but the discounted payback method overcomes this problem.E) A) and B)
F) All of the above

Question 8

The MIRR method has wide appeal for professors, but most business executives prefer the NPV method to either the regular IRR or MIRR.

Accepted Answer

A) True 
 B)False  False

Question 9

Because "present value" refers to the value of cash flows that occur at different points in time, a series of present values should not be summed to determine the value of a capital budgeting project.

Accepted Answer

A) True 
 B)False

Question 10

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.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following statements is correct?

Accepted Answer

A)   The MIRR and NPV decision criteria can never conflict.
B)   The IRR method can never be subject to the multiple IRR problem, while the MIRR method can be.
C)   One reason some people prefer the MIRR to the regular IRR is that the MIRR is based on what is generally a more reasonable assumption about the reinvestment rate than the regular IRR.
D)   The higher the WACC, the shorter the discounted payback period.E) None of the above
F) C) and D)

Question 12

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.

Accepted Answer

A)   A project's regular IRR is found by compounding the initial cost at the WACC to find the terminal value (TV) , then discounting the TV at the WACC.
B)   A project's regular IRR is found by compounding the cash inflows at the WACC to find the present value (PV) , then discounting to find the IRR.
C)   If a project's IRR is smaller than the WACC, then its NPV will be positive.
D)   A project's IRR is the discount rate that causes the PV of the inflows to equal the project's cost.E) B) and D)
F) A) and D)

Question 13

Project X's IRR is 19% and Project Y's IRR is 17%. The projects have the same risk and the same lives, and each has constant cash flows during each year of their lives. If the WACC is 10%, Project Y has a higher NPV than X. Given this information, which of the following statements is correct?

Accepted Answer

A)   The crossover rate between the two projects must be less than 10%.
B)   The crossover rate between the two projects must be greater than 10%.
C)   If the WACC is 8%, Project X will have the higher NPV.
D)   If the WACC is 18%, Project Y will have the higher NPV.E) C) and D)
F) A) and B)

Question 14

Which statement regarding the IRR method 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 does not assume that the cash flows to be received from a project can be reinvested at a rate other than the IRR itself.E) B) and D)
F) A) and C)

Question 15

If a project's NPV exceeds its IRR, then the project should be accepted.

Accepted Answer

A) True 
 B)False

Question 16

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.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following statements is correct?

Accepted Answer

A)   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.
B)   The discounted payback method eliminates all of the problems associated with the payback method.
C)   When evaluating independent projects, the NPV and IRR methods often yield conflicting results regarding a project's acceptability.
D)   To find the MIRR, we discount the TV at the IRR.E) All of the above
F) B) and C)

Question 18

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.

Accepted Answer

A)   If Project A has a higher IRR than Project B, then Project A must have the lower NPV.
B)   If Project A has a higher IRR than Project B, then Project A must also have a higher NPV.
C)   The IRR calculation implicitly assumes that all cash flows are reinvested at the WACC.
D)   If a project has normal cash flows and its IRR exceeds its WACC, then the project's NPV must be positive.E) A) and B)
F) None of the above D

Question 19

Conflicts between two mutually exclusive projects, where the NPV method chooses one project but the IRR method chooses the other, should generally be resolved in favour of the project with the higher NPV.

Accepted Answer

A) True 
 B)False

Question 20

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

Accepted Answer

A) True 
 B)False

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

If the IRR of normal Project X is greater than the IRR of mutually exclusive Project Y (also normal), we can conclude that the firm should select X rather than Y if X has NPV > 0.

Correct Answer
verified

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

Correct Answer
verified

The phenomenon called "multiple internal rates of return" arises when two or more mutually exclusive projects that have different lives are being compared.

Correct Answer
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Correct Answer
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A

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.

Correct Answer
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Other things held constant, an increase in the cost of capital will result in a decrease in a project's IRR.

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 outflow followed by a series of inflows.

Correct Answer
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The MIRR method has wide appeal for professors, but most business executives prefer the NPV method to either the regular IRR or MIRR.

Correct Answer
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False

Because "present value" refers to the value of cash flows that occur at different points in time, a series of present values should not be summed to determine the value of a capital budgeting project.

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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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.

Correct Answer
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Project X's IRR is 19% and Project Y's IRR is 17%. The projects have the same risk and the same lives, and each has constant cash flows during each year of their lives. If the WACC is 10%, Project Y has a higher NPV than X. Given this information, which of the following statements is correct?

Correct Answer
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Which statement regarding the IRR method is correct?

Correct Answer
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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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Which of the following statements is correct?

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 outflow followed by a series of inflows.

Correct Answer
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D

Conflicts between two mutually exclusive projects, where the NPV method chooses one project but the IRR method chooses the other, should generally be resolved in favour of the project with the higher NPV.

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

Correct Answer
verified

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

If the IRR of normal Project X is greater than the IRR of mutually exclusive Project Y (also normal), we can conclude that the firm should select X rather than Y if X has NPV > 0.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The phenomenon called "multiple internal rates of return" arises when two or more mutually exclusive projects that have different lives are being compared.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedA

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.

Correct AnswerverifiedShow Answer

Other things held constant, an increase in the cost of capital will result in a decrease in a project's IRR.

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

The MIRR method has wide appeal for professors, but most business executives prefer the NPV method to either the regular IRR or MIRR.

Correct AnswerverifiedFalse

Because "present value" refers to the value of cash flows that occur at different points in time, a series of present values should not be summed to determine the value of a capital budgeting project.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Project X's IRR is 19% and Project Y's IRR is 17%. The projects have the same risk and the same lives, and each has constant cash flows during each year of their lives. If the WACC is 10%, Project Y has a higher NPV than X. Given this information, which of the following statements is correct?

Correct AnswerverifiedShow Answer

Which statement regarding the IRR method is correct?

Correct AnswerverifiedShow Answer

If a project's NPV exceeds its IRR, then the project should be accepted.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedD

Conflicts between two mutually exclusive projects, where the NPV method chooses one project but the IRR method chooses the other, should generally be resolved in favour of the project with the higher NPV.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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A

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False

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D

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