Question 1

Corner Jewelers, Inc. recently analyzed the project whose cash flows are shown below. However, before the company decided to accept or reject the project, the Federal Reserve changed interest rates and therefore the firm's cost of capital (r) . The Fed's action did not affect the forecasted cash flows. By how much did the change in the r affect the project's forecasted NPV? Note that a project's expected NPV can be negative, in which case it should be rejected.
   Old r: 8.00% New r: 11.25% Year 0123 Cash flows −$1,000$410$410$410\begin{array} { l c c c c } 	ext { Old r: } &8.00 \% & 	ext { New r: } & 11.25 \% \	ext { Year } & 0 & 1 & 2 & 3 \	ext { Cash flows } & - \$ 1,000 & \$ 410 & \$ 410 & \$ 410\end{array} Old r:  Year  Cash flows ​8.00%0−$1,000​ New r: 1$410​11.25%2$410​3$410​

Accepted Answer

A)   $59.03
B)  $56.08
C)   $53.27
D)   $50.61
E)  $48.08 F) A) and B)
G) B) and E)

Question 2

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 discounting the cash inflows at the cost of capital to find the present value (pv) , then compounding this pv to find the irr.
B)   if a project's irr is greater than the wacc, then its npv must be negative.
C)   to find a project's irr, we must solve for the discount rate that causes the pv of the inflows to equal the pv of the project's costs.
D)   to find a project's irr, we must find a discount rate that is equal to the cost of capital.
E)   a project's regular irr is found by compounding the cash inflows at the cost of capital to find the terminal value (tv) , then discounting this tv at the cost of capital.F) C) and E)
G) A) and B)

Question 3

Poder Inc. is considering a project that has the following cash flow data. What is the project's payback?
   Year 0123 Cash flows −$750$300$325$350\begin{array} { l c c c c } 	ext { Year } & 0 & 1 & 2 & 3 \ 	ext { Cash flows } & - \$ 750 & \$ 300 & \$ 325 & \$ 350\end{array} Year  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) None of the above
G) C) and D)

Question 4

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) A) and E)
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.  r=10.25% Year 01234 CFS −$950$500$800$0$800\begin{array} { c c c c c r } & r = 10.25 \% \	ext { Year } &0& 1 & 2 & 3 & 4 \	ext { CFS } & - \$ 950 & \$ 500 & \$ 800 & \$ 0 & \$ 800\end{array} Year  CFS ​r=10.25%0−$950​1$500​2$800​3$0​4$800​

Accepted Answer

A)   $24.14
B)   $26.82
C)   $29.80
D)   $33.11
E)   $36.42 F) C) and D)
G) None of the above

Question 6

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) B) and D)
G) All of the above

Question 7

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 8

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.  r=700% Year 01234 CF S−$1,100$550$600$100$100 CFL−$2,750$725$725$800$1,400\begin{array} { c c c c c c } &r = 700 \% \	ext { Year } & 0& 1 & 2 & 3 & 4 \ 	ext { CF }_{S} & - \$ 1,100 & \$ 550 & \$ 600 & \$ 100 & \$ 100 \	ext { CF}_{L} & - \$ 2,750 & \$ 725 & \$ 725 & \$ 800 & \$ 1,400\end{array} Year  CF S​ CFL​​r=700%0−$1,100−$2,750​1$550$725​2$600$725​3$100$800​4$100$1,400​

Accepted Answer

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

Question 9

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.
  r=10.00% Year 0123 Cash Elows −$1,000$400$400$450\begin{array} { l c c c c } &r = 10.00 \%\	ext { Year } & 0 & 1 & 2 & 3 \	ext { Cash Elows }  & - \$ 1,000 & \$ 400 & \$ 400& \$ 450\end{array} Year  Cash Elows ​r=10.00%0−$1,000​1$400​2$400​3$450​

Accepted Answer

A)   9.32%
B)   10.35%
C)   11.50%
D)   12.78%
E)   14.20% F) All of the above
G) D) and E)

Question 10

Carolina Company is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and are not repeatable. If the decision is made by choosing the project with the higher IRR, how much value will be forgone? Note that under some conditions choosing projects on the basis of the IRR will cause $0.00 value to be lost.  r:7.75% Year 01234CFS−$1,050$675$650CFL−$1,050$360$360$360360\begin{array} { c c c c c c } r : 7.75 \% & & & &  \	ext { Year } & { 0} & 1 & 2 & 3 & 4 \\mathrm{CF}_{\mathrm{S}}& - \$ 1,050 & \$ 675 & \$ 650 & & \\mathrm { CF } _ { \mathrm { L } } & - \$ 1,050 & \$ 360 & \$ 360 & \$ 360 & 360\end{array}r:7.75% Year CFS​CFL​​0−$1,050−$1,050​1$675$360​2$650$360​3$360​4360​

Accepted Answer

A)   $11.45
B)   $12.72
C)   $14.63
D)   $16.82
E)   $19.35 F) A) and E)
G) D) and E)

Question 11

Suzanne's Cleaners is considering a project that has the following cash flow data. What is the project's payback?
   Year 012345 Cash flows −$1,100$300$310$320$330$340\begin{array}{lcccccc}	ext { Year } & 0 & 1 & 2 & 3 & 4 & 5 \	ext { Cash flows }& -\$ 1,100 & \$ 300 & \$ 310 & \$ 320 & \$ 330 & \$ 340\end{array} Year  Cash flows ​0−$1,100​1$300​2$310​3$320​4$330​5$340​

Accepted Answer

A)   2.31 years
B)   2.56 years
C)   2.85 years
D)   3.16 years
E)   3.52 years F) A) and B)
G) A) and C)

Question 12

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

Question 13

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 cost of capital, then the mirr will be less than the irr.
C)   if a project's irr is greater than its cost of capital, 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 cost of capital.
E)   a project's mirr is always greater than its regular irr.F) B) and D)
G) A) and B)

Question 14

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 NPV.

Accepted Answer

A) True 
 B)False

Question 15

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

Question 16

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?  r1:6.00% Year 01234CFS−$1,025$380$380$380$380CFL−$2,150$765$765$765$765\begin{array}{cccccc}r&{1: 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}r Year CFS​CFL​​1:6.00%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) A) and E)
G) B) and D)

Question 17

Which of the following statements is CORRECT?

Accepted Answer

A)   the discounted payback method recognizes all cash flows over a project's life, and it also adjusts these cash flows to account for the time value of money.
B)   the regular payback method was, years ago, widely used, but virtually no companies even calculate the payback today.
C)   the regular payback is useful as an indicator of a project's liquidity because it gives managers an idea of how long it will take to recover the funds invested in a project.
D)   the regular payback does not consider cash flows beyond the payback year, but the discounted payback overcomes this defect.
E)   the regular payback method recognizes all cash flows over a project's life.F) B) and E)
G) C) and E)

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

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 forgoneσ 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.
  r:10.25% Year 01234CFS−$2,050$750$760$770$780CFL−$4,300$1,500$1,518$1,536$1,554\begin{array}{cccccr}{r}{: 10.25 \%} & & & & \	ext { Year } & 0 & 1 & 2 & 3 & 4 \\hline\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}r:10.25% Year CFS​CFL​​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) C) and E)
G) B) and E)

Question 20

Projects S and L are equally risky, mutually exclusive, and have normal cash flows. Project S has an IRR of 15%, while Project L's IRR is 12%. The two projects have the same NPV when the cost of capital is 7%. Which of the following statements is CORRECT?

Accepted Answer

A)   if the cost of capital is 6%, project s will have the higher npv.
B)   if the cost of capital is 13%, project s will have the lower npv.
C)   if the cost of capital is 10%, both projects will have a negative npv.
D)   project s's npv is more sensitive to changes in cost of capital than project l's.
E)   if the cost of capital is 10%, both projects will have positive npvs.F) None of the above
G) All of the above

Exam 12: Capital Budgeting: Decision Criteria

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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Which of the following statements is CORRECT?

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? $\begin{array} { l c c c c } \text { Year } & 0 & 1 & 2 & 3 \\ \text { Cash flows } & - \$ 750 & \$ 300 & \$ 325 & \$ 350\end{array}$

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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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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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 NPV.

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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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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Suzanne's Cleaners is considering a project that has the following cash flow data. What is the project's payback? $\begin{array}{lcccccc}\text { Year } & 0 & 1 & 2 & 3 & 4 & 5 \\\text { Cash flows }& -\$ 1,100 & \$ 300 & \$ 310 & \$ 320 & \$ 330 & \$ 340\end{array}$

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Projects S and L are equally risky, mutually exclusive, and have normal cash flows. Project S has an IRR of 15%, while Project L's IRR is 12%. The two projects have the same NPV when the cost of capital is 7%. 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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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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Correct Answer
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Exam 12: Capital Budgeting: Decision Criteria

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

Which of the following statements is CORRECT?

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

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

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 NPV.

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

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.

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Correct AnswerverifiedShow Answer

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Which of the following statements is CORRECT?

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Projects S and L are equally risky, mutually exclusive, and have normal cash flows. Project S has an IRR of 15%, while Project L's IRR is 12%. The two projects have the same NPV when the cost of capital is 7%. Which of the following statements is CORRECT?

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.

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