Exam 9: Capital Budgeting Techniques

A) 11.18%
B) 12.05%
C) 13.47%
D) 14.66%
E) 15.89%

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A) Both projects should be purchased, because the IRRs for both projects exceed the firm's required rate of return.
B) Neither project should be accepted, because the IRRs for both projects exceed the firm's required rate of return.
C) Project Q should be accepted, because its net present value (NPV) is higher than Project R's NPV.
D) Project R should be accepted, because its net present value (NPV) is higher than Project Q's NPV.
E) None of the above is a correct answer.

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A) 2 years
B) 4 years
C) 6 years
D) 8 years
E) 10 years

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A) Because discounted payback takes account of the required rate of return, a project's discounted payback is normally shorter than its regular payback.
B) The NPV and IRR methods use the same basic equation, but in the NPV method the discount rate is specified and the equation is solved for NPV, while in the IRR method the NPV is set equal to zero and the discount rate is found.
C) If the required rate of return is less than the crossover rate for two mutually exclusive projects' NPV profiles, a NPV/IRR conflict will not occur.
D) If you are choosing between two projects which have the same life, and if their NPV profiles cross, then the smaller project will probably be the one with the steeper NPV profile.
E) If the required rate of return is relatively high, this will favor larger, longer-term projects over smaller, shorter-term alternatives because it is good to earn high rates on larger amounts over longer periods.

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A) Income is reduced by taxes paid, but cash flow is not.
B) There is a greater probability of realising the projected cash flow than the forecasted income.
C) Income is reduced by dividends paid, but cash flow is not.
D) Income is reduced by depreciation charges, but cash flow is not.
E) Cash flow reflects any change in net working capital, but sales do not.

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A) 36%
B) 32%
C) 28%
D) 24%
E) 20%

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A) The project should be rejected because the modified IRR is less than the regular IRR.
B) The project should be accepted because the modified IRR is greater than the required rate of return.
C) The regular IRR is less than the required rate of return.Under this condition, the modified IRR will also be less than the regular IRR.
D) If the regular IRR is less than the required rate of return, then the modified IRR will be greater than the regular IRR.
E) Given the data in the problem, the NPV is negative.This demonstrates that the modified IRR criterion is not always a valid decision method for projects such as this one.

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A) If the two projects have the same investment cost, and if their NPV profiles cross once in the upper right quadrant, at a discount rate of 40 percent, this suggests that a NPV versus IRR conflict is not likely to exist.
B) If the two projects' NPV profiles cross once, in the upper left quadrant, at a discount rate of minus 10 percent, then there will probably not be a NPV versus IRR conflict, irrespective of the relative sizes of the two projects, in any meaningful, practical sense (that is, a conflict which will affect the actual investment decision) .
C) If one of the projects has a NPV profile which crosses the X-axis twice, hence the project appears to have two IRRs, your assistant must have made a mistake.
D) Whenever a conflict between NPV and IRR exist, then, if the two projects have the same initial cost, the one with the steeper NPV profile probably has less rapid cash flows.However, if they have identical cash flow patterns, then the one with the steeper profile probably has the lower initial cost.
E) If the two projects both have a single outlay at t = 0, followed by a series of positive cash inflows, and if their NPV profiles cross in the lower left quadrant, then one of the projects should be accepted, and both would be accepted if they were not mutually exclusive.

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A) In general, the NPVs of riskier cash flows should be found using relatively high discount rates.However, if a cash flow is negative, it should be evaluated using a low discount rate.
B) If a project has only costs (no revenues) as would certain environmental projects, then the project is likely to have two regular IRRs.
C) If the NPV and IRR methods give conflicting rankings for two mutually exclusive projects, the payback period should be used to choose the project that should be purchased.
D) It is better to use the NPV method to evaluate independent projects, but for mutually exclusive projects, especially if projects vary greatly in size, the IRR method is better.
E) None of the above is a correct statement.

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A) Project LOM only, because it has both the highest NPV and the higher IRR.
B) Projects LOM, QUE, and YUP, because they all have positive NPVs and their IRRs.
C) Projects DOG and QUE, because their IRRs are greater than their risk-adjusted discount the projects returns are higher than the rates of return that capital budgeting manager uses to evaluate them.
D) Projects QUE, YUP, and DOG, because their IRRs are greater than their risk-adjusted discount rates-that is, the projects returns are higher than the rates of return that capital budgeting manager uses to evaluate them.
E) There is not enough information to answer this question, because the firm's average required rate of return cannot be determined.

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A) 10.0%
B) 12.9%
C) 15.2%
D) 18.3%
E) 20.7%

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A) R243.43
B) R291.70
C) R332.50
D) R481.15
E) R535.13

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A) One can find the "cross-over rate," or the discount rate at which two normal projects have the same NPV, by finding the IRR of the differences in the projects' yearly cash flows.
B) If you calculate a project's MIRR and find it to be the same as the regular IRR, you can be sure you made a mistake.
C) If a project's IRR is less than its required rate of return, then the discounted payback period will be less than the regular payback period.
D) If a project has a cash outflow at t = 0 followed by a single cash inflow at t = 10, then the MIRR will be less than the regular IRR.
E) If a project has a cash outflow at t = 0 followed by a single cash inflow at t = 10, then the MIRR will be greater than the regular IRR.

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