Question 1

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 2

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 3

Westwood Painting Co. 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.

Accepted Answer

A)   13.42%
B)   14.91%
C)   16.56%
D)   18.22%
E)   20.04%F) B) and E)
G) A) and D)

Question 4

A firm should never accept a project if its acceptance would lead to an increase in the firm's cost of capital (its WACC).

Accepted Answer

A) True 
 B)False

Question 5

Martin Manufacturing is considering two normal, equally risky, mutually exclusive, but not repeatable projects. Martin's cost of capital is 10%. The two projects have the same investment costs, but Project A has an IRR of 15%, while Project B has an IRR of 20%. Assuming the projects' NPV profiles cross in the upper right quadrant, which of the following statements is CORRECT?

Accepted Answer

A)   Since the projects are mutually exclusive, the firm should always select Project B.
B)   If the crossover rate is 8%, Project B will have the higher NPV.
C)   Only one project has a positive NPV.
D)   If the crossover rate is 8%, Project A will have the higher NPV.
E)   Each project must have a negative NPV.F) C) and E)
G) B) and C)

Question 6

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 C)
G) B) and C)

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)   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) A) and E)
G) None of the above

Question 8

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 cost of capital of 10%, the two projects have identical NPVs. Which project's NPV is more sensitive to changes in the cost of capital?

Accepted Answer

A)   Project L.
B)   Both projects are equally sensitive to changes in the cost of capital 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) None of the above
G) A) and E)

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

Westwood Painting Co. 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.

Correct Answer
verified

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
verified

Correct Answer
verified

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
verified

Which of the following statements is CORRECT?

Correct Answer
verified

A firm should never accept a project if its acceptance would lead to an increase in the firm's cost of capital (its WACC).

Correct Answer
verified

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
verified

Correct Answer
verified

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

Westwood Painting Co. 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.

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

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

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

A firm should never accept a project if its acceptance would lead to an increase in the firm's cost of capital (its WACC).

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

Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
verified

Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
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