Question 1

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 cost of capital,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 cost of capital,while the IRR method assumes reinvestment at the IRR.

Question 2

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.

Question 3

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.

Question 4

Suppose a firm relies exclusively on the payback method when making capital budgeting decisions,and it sets a 4-year payback regardless of economic conditions.Other things held constant,which of the following statements is most likely to be true?

Accepted Answer

A)   It will accept too many long-term projects and reject too many short-term projects (as judged by the NPV) .
B)   The firm will accept too many projects in all economic states because a 4-year payback is too low.
C)   The firm will accept too few projects in all economic states because a 4-year payback is too high.
D)   If the 4-year payback results in accepting just the right set of projects under average economic conditions,then this payback will result in too few long-term projects when the economy is weak.
E)   It will accept too many short-term projects and reject too many long-term projects (as judged by the NPV) .

Question 5

The NPV method's assumption that cash inflows are reinvested at the cost of capital is generally more reasonable than the IRR's assumption that cash flows are reinvested at the IRR.This is an important reason why the NPV method is generally preferred over the IRR method.

Accepted Answer

A) True 
 B)False

Question 6

For a project with one initial cash outflow followed by a series of positive cash inflows,the modified IRR (MIRR)method involves compounding the cash inflows out to the end of the project's life,summing those compounded cash flows to form a terminal value (TV),and then finding the discount rate that causes the PV of the TV to equal the project's cost.

Accepted Answer

A) True 
 B)False

Question 7

The internal rate of return is that discount rate that equates the present value of the cash outflows (or costs)with the present value of the cash inflows.

Accepted Answer

A) True 
 B)False  True

Question 8

Clifford Company is choosing between two projects.The larger project has an initial cost of $100,000,annual cash flows of $30,000 for 5 years,and an IRR of 15.24%.The smaller project has an initial cost of $50,000,annual cash flows of $16,000 for 5 years,and an IRR of 16.63%.The projects are equally risky.Which of the following statements is CORRECT?

Accepted Answer

A)   Since the smaller project has the higher IRR,the two projects' NPV profiles will cross,and the larger project will look better based on the NPV at all positive values of the cost of capital.
B)   If the company uses the NPV method,it will tend to favor smaller,shorter-term projects over larger,longer-term projects,regardless of how high or low the cost of capital is.
C)   Since the smaller project has the higher IRR but the larger project has the higher NPV at a zero discount rate,the two projects' NPV profiles will cross,and the larger project will have the higher NPV if the cost of capital is less than the crossover rate.
D)   Since the smaller project has the higher IRR and the larger NPV at a zero discount rate,the two projects' NPV profiles will cross,and the smaller project will look better if the cost of capital is less than the crossover rate.
E)   Since the smaller project has the higher IRR,the two projects' NPV profiles cannot cross,and the smaller project's NPV will be higher at all positive values of the cost of capital.

Question 9

One advantage of the payback method for evaluating potential investments is that it provides information about a project's liquidity and risk.

Accepted Answer

A) True 
 B)False

Question 10

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 11

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 12

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.

Question 13

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 14

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 15

When evaluating mutually exclusive projects,the modified IRR (MIRR)always leads to the same capital budgeting decisions as the NPV method,regardless of the relative lives or sizes of the projects being evaluated.

Accepted Answer

A) True 
 B)False  False

Question 16

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. B

Question 17

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.

Question 18

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 19

Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows,with one cash outflow at t = 0 followed by a series of positive cash flows.

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 its MIRR will be greater than the IRR.
C)   To find a project's MIRR,we compound cash inflows at the regular IRR and then find the discount rate that causes the PV of the terminal value to equal the initial cost.
D)   To find a project's MIRR,the textbook procedure compounds cash inflows at the cost of capital and then finds the discount rate that causes the PV of the terminal value to equal the initial cost.
E)   A project's MIRR is always greater than its regular IRR.

Question 20

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.

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

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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Correct Answer
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Suppose a firm relies exclusively on the payback method when making capital budgeting decisions,and it sets a 4-year payback regardless of economic conditions.Other things held constant,which of the following statements is most likely to be true?

Correct Answer
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The NPV method's assumption that cash inflows are reinvested at the cost of capital is generally more reasonable than the IRR's assumption that cash flows are reinvested at the IRR.This is an important reason why the NPV method is generally preferred over the IRR method.

Correct Answer
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Correct Answer
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The internal rate of return is that discount rate that equates the present value of the cash outflows (or costs)with the present value of the cash inflows.

Correct Answer
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True

Correct Answer
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One advantage of the payback method for evaluating potential investments is that it provides information about a project's liquidity and risk.

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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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

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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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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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
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When evaluating mutually exclusive projects,the modified IRR (MIRR)always leads to the same capital budgeting decisions as the NPV method,regardless of the relative lives or sizes of the projects being evaluated.

Correct Answer
verified
False

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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B

Which of the following statements is CORRECT?

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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Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows,with one cash outflow at t = 0 followed by a series of positive cash flows.

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

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

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Suppose a firm relies exclusively on the payback method when making capital budgeting decisions,and it sets a 4-year payback regardless of economic conditions.Other things held constant,which of the following statements is most likely to be true?

Correct AnswerverifiedShow Answer

The NPV method's assumption that cash inflows are reinvested at the cost of capital is generally more reasonable than the IRR's assumption that cash flows are reinvested at the IRR.This is an important reason why the NPV method is generally preferred over the IRR method.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The internal rate of return is that discount rate that equates the present value of the cash outflows (or costs)with the present value of the cash inflows.

Correct AnswerverifiedTrue

Correct AnswerverifiedShow Answer

One advantage of the payback method for evaluating potential investments is that it provides information about a project's liquidity and risk.

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

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

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

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

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

When evaluating mutually exclusive projects,the modified IRR (MIRR)always leads to the same capital budgeting decisions as the NPV method,regardless of the relative lives or sizes of the projects being evaluated.

Correct AnswerverifiedFalse

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 AnswerverifiedB

Which of the following statements is CORRECT?

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

Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows,with one cash outflow at t = 0 followed by a series of positive cash flows.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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True

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False

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B

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