Question 1

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) None of the above
G) B) and D)

Question 2

Normal Projects S and L have the same NPV when the discount rate is zero.However, Project S's cash flows come in faster than those of L.Therefore, we know that at any discount rate greater than zero, L will have the higher NPV.

Accepted Answer

A) True 
 B)False

Question 3

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) C) and D)
G) A) and D)

Question 4

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 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)

Question 5

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?

Accepted Answer

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) B) and C)

Question 6

The NPV method is based on the assumption that projects' cash flows are reinvested at the project's risk-adjusted cost of capital.

Accepted Answer

A) True 
 B)False

Question 7

The cost of capital for two mutually exclusive projects that are being considered is 12%.Project K has an IRR of 20% while Project R's IRR is 15%.The projects have the same NPV at the 12% current cost of capital.Interest rates are currently high.However, you believe that money costs and thus your cost of capital will soon decline.You also think that the projects will not be funded until the cost of capital has decreased, and their cash flows will not be affected by the change in economic conditions.Under these conditions, which of the following statements is CORRECT?

Accepted Answer

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 cost of capital it will have the higher NPV.
C)   You should recommend Project K, because at the new cost of capital it will have the higher NPV.
D)   You should recommend Project R because it will have both a higher IRR and a higher NPV under the new conditions.
E)   You should reject both projects because they will both have negative NPVs under the new conditions.F) B) and C)
G) B) and D)

Question 8

Which of the following statements is CORRECT?

Accepted Answer

A)   One defect of the IRR method versus the NPV is that the IRR does not take account of the time value of money.
B)   One defect of the IRR method versus the NPV is that the IRR does not take account of the cost of capital.
C)   One defect of the IRR method versus the NPV is that the IRR 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 versus the NPV is that the IRR does not take proper account of differences in the sizes of projects.
E)   One defect of the IRR method versus the NPV is that the IRR does not take account of cash flows over a project's full life.F) D) and E)
G) C) and E)

Question 9

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. r:
10) 00%
Year
0
1
2
3
Cash flows
−$950
$500
$400
$300

Accepted Answer

A)   $54.62
B)   $57.49
C)   $60.52
D)   $63.54
E)   $66.72F) None of the above
G) D) and E)

Question 10

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 11

Consider two projects, X and Y.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 cost of capital 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 must be greater than 10%.
B)   If the cost of capital is 8%, Project X will have the higher NPV.
C)   If the cost of capital is 18%, Project Y will have the higher NPV.
D)   Project X is larger in the sense that it has the higher initial cost.
E)   The crossover rate must be less than 10%.F) B) and C)
G) A) and E)

Question 12

Which of the following statements is CORRECT?

Accepted Answer

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

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

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 also have a higher NPV.
B)   The IRR calculation implicitly assumes that all cash flows are reinvested at the cost of capital.
C)   The IRR calculation implicitly assumes that cash flows are withdrawn from the business rather than being reinvested in the business.
D)   If a project has normal cash flows and its IRR exceeds its cost of capital, then the project's NPV must be positive.
E)   If Project A has a higher IRR than Project B, then Project A must have the lower NPV.F) C) and D)
G) D) and E)

Question 15

Which of the following statements is CORRECT?

Accepted Answer

A)   To find the MIRR, we first compound cash flows at the regular IRR to find the TV, and then we discount the TV at the cost of capital to find the PV.
B)   The NPV and IRR methods both assume that cash flows can be reinvested at the cost of capital.However, the MIRR method assumes reinvestment at the MIRR itself.
C)   If two projects have the same cost, and if their NPV profiles cross in the upper right quadrant, then the project with the higher IRR probably has more of its cash flows coming in the later years.
D)   If two projects have the same cost, and if their NPV profiles cross in the upper right quadrant, then the project with the lower IRR probably has more of its cash flows coming in the later years.
E)   For a project with normal cash flows, any change in the cost of capital will change both the NPV and the IRR.F) A) and B)
G) A) and C)

Question 16

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 17

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 lower the cost of capital used to calculate a project's NPV, the lower the calculated NPV will be.
B)   If a project's NPV is less 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 NPV of a relatively low-risk project should be found using a relatively high cost of capital.
E)   A project's NPV is found by compounding the cash inflows at the IRR to find the terminal value (TV) , then discounting the TV at the cost of capital.F) A) and B)
G) All of the above

Question 18

A project's IRR is independent of the firm's cost of capital.In other words, a project's IRR doesn't change with a change in the firm's cost of capital.

Accepted Answer

A) True 
 B)False

Question 19

Project S has a pattern of high cash flows in its early life, while Project L has a longer life, with large cash flows late in its life.Neither has negative cash flows after Year 0, and at the current cost of capital, the two projects have identical NPVs.Now suppose interest rates and money costs decline.Other things held constant, this change will cause L to become preferred to S.

Accepted Answer

A) True 
 B)False

Question 20

The cost of capital for two mutually exclusive projects that are being considered is 8%.Project K has an IRR of 20% while Project R's IRR is 15%.The projects have the same NPV at the 8% current cost of capital.However, you believe that money costs and thus your cost of capital will also increase.You also think that the projects will not be funded until the cost of capital has increased, and their cash flows will not be affected by the change in economic conditions.Under these conditions, which of the following statements is CORRECT?

Accepted Answer

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 cost of capital it will have the higher NPV.
C)   You should recommend Project K, because at the new cost of capital 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 cost of capital.
E)   You should reject both projects because they will both have negative NPVs under the new conditions.F) A) and B)
G) A) and C)

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

Which of the following statements is CORRECT?

Correct Answer
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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?

Correct Answer
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Correct Answer
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A project's IRR is independent of the firm's cost of capital.In other words, a project's IRR doesn't change with a change in the firm's cost of capital.

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

Correct Answer
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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. r: 10) 00% Year 0 1 2 3 Cash flows −$950 $500 $400 $300

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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Normal Projects S and L have the same NPV when the discount rate is zero.However, Project S's cash flows come in faster than those of L.Therefore, we know that at any discount rate greater than zero, L will have the higher NPV.

Correct Answer
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The NPV method is based on the assumption that projects' cash flows are reinvested at the project's risk-adjusted 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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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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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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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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Which of the following statements is CORRECT?

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

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A project's IRR is independent of the firm's cost of capital.In other words, a project's IRR doesn't change with a change in the firm's 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 compared to one another.

Correct AnswerverifiedShow Answer

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. r: 10) 00% Year 0 1 2 3 Cash flows −$950 $500 $400 $300

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

Normal Projects S and L have the same NPV when the discount rate is zero.However, Project S's cash flows come in faster than those of L.Therefore, we know that at any discount rate greater than zero, L will have the higher NPV.

Correct AnswerverifiedShow Answer

The NPV method is based on the assumption that projects' cash flows are reinvested at the project's risk-adjusted cost of capital.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

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

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

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

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

Correct AnswerverifiedShow Answer

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

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