Question 1

When considering two mutually exclusive projects,the firm should always select the project whose internal rate of return is the highest,provided the projects have the same initial cost.This statement is true regardless of whether the projects can be repeated or not.

Accepted Answer

A) True 
 B)False

Question 2

Yoga Center Inc.is considering a project that has the following cash flow and WACC data.What is the project's NPV? Note that a project's expected NPV can be negative,in which case it will be rejected.   WACC: 14.00% Year 01234 Cash flows −$1,200$400$425$450$475\begin{array}{lccccc}	ext { WACC: } & 14.00 \% & & & \	ext { Year } & 0 & 1 & 2 & 3 & 4 \ 	ext { Cash flows } & -\$ 1,200 & \$ 400 & \$ 425 & \$ 450 & \$ 475\end{array} WACC:  Year  Cash flows ​14.00%0−$1,200​1$400​2$425​3$450​4$475​

Accepted Answer

A)   $41.25
B)   $45.84
C)   $50.93
D)   $56.59
E)   $62.88 F) B) and D)
G) D) and E)

Question 3

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.   WACC: 10.25% Year 01234CFS−$2,050$750$760$770$780CFL−$4,300$1,500$1,518$1,536$1,554\begin{array}{lccccc}	ext { WACC: } & 10.25 \% & & & & \	ext { Year } & 0 & 1 & 2 & 3 & 4 \\mathrm{CF}_{\mathrm{S}} & -\$ 2,050 & \$ 750 & \$ 760 & \$ 770 & \$ 780 \\mathrm{CF}_{\mathrm{L}} & -\$ 4,300 & \$ 1,500 & \$ 1,518 & \$ 1,536 & \$ 1,554\end{array} WACC:  Year CFS​CFL​​10.25%0−$2,050−$4,300​1$750$1,500​2$760$1,518​3$770$1,536​4$780$1,554​

Accepted Answer

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

Question 4

Worthington Inc.is considering a project that has the following cash flow data.What is the project's payback?   Year 0123 Cash flows −$500$150$200$300\begin{array}{lcccc}	ext { Year } & 0 & 1 & 2 & 3 \	ext { Cash flows } & -\$ 500 & \$ 150 & \$ 200 & \$ 300\end{array} Year  Cash flows ​0−$500​1$150​2$200​3$300​

Accepted Answer

A)   2.03 years
B)   2.25 years
C)   2.50 years
D)   2.75 years
E)   3.03 years F) A) and D)
G) A) and E)

Question 5

Poder Inc.is considering a project that has the following cash flow data.What is the project's payback?   Year 0123\cline2−5 Cash flows −$750$300$325$350\begin{array}{lcccc}	ext { Year } & 0 & 1 & 2 & 3 \\cline { 2 - 5 } 	ext { Cash flows } & -\$ 750 & \$ 300 & \$ 325 & \$ 350\end{array} Year \cline2−5 Cash flows ​0−$750​1$300​2$325​3$350​

Accepted Answer

A)   1.91 years
B)   2.12 years
C)   2.36 years
D)   2.59 years
E)   2.85 years F) A) and B)
G) A) and C)

Question 6

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

Accepted Answer

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 C)
G) A) and E)

Question 7

Murray 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 wants to use the IRR criterion,while the CFO favors the NPV method.You were hired to advise Murray on the best procedure.If the wrong decision criterion is used,how much potential value would Murray lose?   WACC: 6.00% Year 01234CFS−$1,025$380$380$380$380CFL−$2,150$765$765$765$765\begin{array}{lccccc}	ext { WACC: } & 6.00 \% & & & \	ext { Year } & 0 & 1 & 2 & 3 & 4 \\mathrm{CF}_{\mathrm{S}} & -\$ 1,025 & \$ 380 & \$ 380 & \$ 380 & \$ 380 \\mathrm{CF}_{\mathrm{L}} & -\$ 2,150 & \$ 765 & \$ 765 & \$ 765 & \$ 765\end{array} WACC:  Year CFS​CFL​​6.00%0−$1,025−$2,150​1$380$765​2$380$765​3$380$765​4$380$765​

Accepted Answer

A)   $188.68
B)   $198.61
C)   $209.07
D)   $219.52
E)   $230.49 F) B) and E)
G) None of the above

Question 8

Conflicts between two mutually exclusive projects occasionally occur,where the NPV method ranks one project higher but the IRR method ranks the other one first.In theory,such conflicts should be resolved in favor of the project with the higher positive IRR.

Accepted Answer

A) True 
 B)False

Question 9

Nichols Inc.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 WACC or negative,in both cases it will be rejected.   Year 012345 Cash flows −$1,250$325$325$325$325$325\begin{array}{lcccccc}	ext { Year } & 0 & 1 & 2 & 3 & 4 & 5 \ 	ext { Cash flows } & -\$ 1,250 & \$ 325 & \$ 325 & \$ 325 & \$ 325 & \$ 325\end{array} Year  Cash flows ​0−$1,250​1$325​2$325​3$325​4$325​5$325​

Accepted Answer

A)   9.43%
B)   9.91%
C)   10.40%
D)   10.92%
E)   11.47% F) D) and E)
G) All of the above

Question 10

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 11

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 WACC or negative,in both cases it will be rejected.   Year 01234 Cash flows −$1.050$400$400$400$400\begin{array}{lcccc}	ext { Year } & 0 & 1 & 2 & 3&4 \\hline	ext { Cash flows } & -\$ 1.050 & \$ 400 & \$ 400 & \$ 400& \$ 400\end{array} Year  Cash flows ​0−$1.050​1$400​2$400​3$400​4$400​​

Accepted Answer

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

Question 12

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.

Accepted Answer

A) True 
 B)False

Question 13

Shannon Co.is considering a project that has the following cash flow and WACC data.What is the project's discounted payback?   WACC: 10.00% Year 01234 Cash flows −$950$525$485$445$405\begin{array}{lccccc}	ext { WACC: } & 10.00 \% & & & \	ext { Year } & 0 & 1 & 2 & 3 & 4 \	ext { Cash flows } & -\$ 950 & \$ 525 & \$ 485 & \$ 445 & \$ 405\end{array} WACC:  Year  Cash flows ​10.00%0−$950​1$525​2$485​3$445​4$405​

Accepted Answer

A)   1.61 years
B)   1.79 years
C)   1.99 years
D)   2.22 years
E)   2.44 years F) A) and B)
G) B) and E)

Question 14

Dickson Co.is considering a project that has the following cash flow and WACC data.What is the project's NPV? Note that a project's expected NPV can be negative,in which case it will be rejected.   YACC: 12.00% Year 012345 Cash flows −$1,100$400$390$380$370$360\begin{array}{lcccccc}	ext { YACC: } & 12.00 \% & & & & \	ext { Year } & 0 & 1 & 2 & 3 & 4 & 5 \	ext { Cash flows } & -\$ 1,100 & \$ 400 & \$ 390 & \$ 380 & \$ 370 & \$ 360\end{array} YACC:  Year  Cash flows ​12.00%0−$1,100​1$400​2$390​3$380​4$370​5$360​

Accepted Answer

A)   $250.15
B)   $277.94
C)   $305.73
D)   $336.31
E)   $369.94 F) A) and E)
G) A) and C) B

Question 15

Reed Enterprises is considering a project that has the following cash flow and WACC data.What is the project's NPV? Note that a project's expected NPV can be negative,in which case it will be rejected.   WACC: 10.00% Year 0123 Cash flows −$1.050$450$460$470\begin{array}{lcccc}	ext { WACC: } & 10.00 \% \	ext { Year } & 0 & 1 & 2 & 3 \	ext { Cash flows } & -\$ 1.050 & \$ 450 & \$ 460 & \$ 470\end{array} WACC:  Year  Cash flows ​10.00%0−$1.050​1$450​2$460​3$470​

Accepted Answer

A)   $92.37
B)   $96.99
C)   $101.84
D)   $106.93
E)   $112.28 F) C) and D)
G) A) and E)

Question 16

The WACC 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 WACC.However,you believe that money costs and thus your WACC will also increase.You also think that the projects will not be funded until the WACC 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 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.F) All of the above
G) B) and D) C

Question 17

Projects S and L are both normal projects with an initial cost of $10,000,followed by a series of positive cash inflows.Project S's undiscounted net cash flows total $20,000,while L's total undiscounted flows are $30,000.At a WACC of 10%,the two projects have identical NPVs.Which project's NPV is more sensitive to changes in the WACC?

Accepted Answer

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.F) C) and D)
G) None of the above

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)   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.F) B) and D)
G) C) and E)

Question 19

Which of the following statements is CORRECT?

Accepted Answer

A)   The NPV method assumes that cash flows will be reinvested at the risk-free rate, while the IRR method assumes reinvestment at the IRR.
B)   The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the risk-free rate.
C)   The NPV method does not consider all relevant cash flows, particularly cash flows beyond the payback period.
D)   The IRR method does not consider all relevant cash flows, particularly cash flows beyond the payback period.
E)   The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the IRR.F) A) and D)
G) A) and C) E

Question 20

Silverman 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 higher MIRR rather than the one with the higher NPV,how much value will be forgone? Note that under some conditions choosing projects on the basis of the MIRR will cause $0.00 value to be lost.   WACC: 8.75% Year 01234CFS−$1,100$375$375$375$375CFL−$2,200$725$725$725$725\begin{array}{lccccc}	ext { WACC: } & 8.75 \% & & & \	ext { Year } & 0 & 1 & 2 & 3 & 4 \\mathrm{CF}_{\mathrm{S}} & -\$ 1,100 & \$ 375 & \$ 375 & \$ 375 & \$ 375 \\mathrm{CF}_{\mathrm{L}} & -\$ 2,200 & \$ 725 & \$ 725 & \$ 725 & \$ 725\end{array} WACC:  Year CFS​CFL​​8.75%0−$1,100−$2,200​1$375$725​2$375$725​3$375$725​4$375$725​

Accepted Answer

A)   $32.12
B)   $35.33
C)   $38.87
D)   $40.15
E)   $42.16 F) C) and D)
G) A) and D)

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

When considering two mutually exclusive projects,the firm should always select the project whose internal rate of return is the highest,provided the projects have the same initial cost.This statement is true regardless of whether the projects can be repeated or not.

Correct Answer
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Correct Answer
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Worthington Inc.is considering a project that has the following cash flow data.What is the project's payback? $\begin{array}{lcccc}\text { Year } & 0 & 1 & 2 & 3 \\\text { Cash flows } & -\$ 500 & \$ 150 & \$ 200 & \$ 300\end{array}$

Correct Answer
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Poder Inc.is considering a project that has the following cash flow data.What is the project's payback? $\begin{array}{lcccc}\text { Year } & 0 & 1 & 2 & 3 \\\cline { 2 - 5 } \text { Cash flows } & -\$ 750 & \$ 300 & \$ 325 & \$ 350\end{array}$

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

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Conflicts between two mutually exclusive projects occasionally occur,where the NPV method ranks one project higher but the IRR method ranks the other one first.In theory,such conflicts should be resolved in favor of the project with the higher positive IRR.

Correct Answer
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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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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.

Correct Answer
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Shannon Co.is considering a project that has the following cash flow and WACC data.What is the project's discounted payback? $\begin{array}{lccccc}\text { WACC: } & 10.00 \% & & & \\\text { Year } & 0 & 1 & 2 & 3 & 4 \\\text { Cash flows } & -\$ 950 & \$ 525 & \$ 485 & \$ 445 & \$ 405\end{array}$

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B

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C

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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.

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Which of the following statements is CORRECT?

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E

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

When considering two mutually exclusive projects,the firm should always select the project whose internal rate of return is the highest,provided the projects have the same initial cost.This statement is true regardless of whether the projects can be repeated or not.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Conflicts between two mutually exclusive projects occasionally occur,where the NPV method ranks one project higher but the IRR method ranks the other one first.In theory,such conflicts should be resolved in favor of the project with the higher positive IRR.

Correct AnswerverifiedShow Answer

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

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.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedB

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Correct AnswerverifiedC

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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.

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Which of the following statements is CORRECT?

Correct AnswerverifiedE

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B

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C

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E

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