Question 1

the regular and the modified IRR (MIRR) methods have wide appeal to professors, but most business executives prefer the NPV method to either of the IRR methods.

Accepted Answer

A) True 
 B)False

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 WACC 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 WACC.
E)   A project's regular IRR is found by compounding the cash inflows at the WACC to find the terminal value (TV) , then discounting this TV at the WACC.F) All of the above
G) A) and E)

Question 3

primary reason that the NPV method is conceptually superior to the IRR method for evaluating mutually exclusive investments is that multiple IRRs may exist, and when that happens, we don't know which IRR is relevant.

Accepted Answer

A) True 
 B)False

Question 4

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 WACC.
C)   The IRR calculation implicitly assumes that cash flows are withdrawn from the business rather than being reinvested in the business.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 WACC, 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 C)
G) A) and B)

Question 5

conflict will exist between the NPV and IRR methods, when used to evaluate two equally risky but mutually exclusive projects, if the projects' cost of capital exceeds the rate at which the projects' NPV profiles cross.

Accepted Answer

A) True 
 B)False

Question 6

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 7

NPV and IRR methods, when used to evaluate two independent and equally risky projects, will lead to different accept/reject decisions and thus capital budgets if the projects' IRRs are greater than their cost of capital.

Accepted Answer

A) True 
 B)False

Question 8

Project S has a pattern of high cash flows in its early life, while Project L has a longer life, with large cash flows late in its life Neither has negative cash flows after Year 0, and at the current cost of capital, the two projects have identical NPVs Now suppose interest rates and money costs decline Other things held constant, this change will cause L to become preferred to S.

Accepted Answer

A) True 
 B)False

Question 9

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) B) and E)

Question 10

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 11

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

Question 12

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 13

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 WACC, 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 WACC 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.F) A) and B)
G) A) and D)

Question 14

Which of the following statements is CORRECT?

Accepted Answer

A)   If the cost of capital declines, this lowers a project's NPV.
B)   The NPV method is regarded by most academics as being the best indicator of a project's profitability; hence, most academics recommend that firms use only this one method.
C)   A project's NPV depends on the total amount of cash flows the project produces, but because the cash flows are discounted at the WACC, it does not matter if the cash flows occur early or late in the project's life.
D)   The NPV and IRR methods may give different recommendations regarding which of two mutually exclusive projects should be accepted, but they always give the same recommendation regarding the acceptability of a normal, independent project.
E)   The NPV method was once the favorite of academics and business executives, but today most authorities regard the MIRR as being the best indicator of a project's profitability.F) B) and D)
G) A) and C)

Question 15

NPV and IRR methods, when used to evaluate two equally risky but mutually exclusive projects, will lead to different accept/reject decisions and thus capital budgets if the cost of capital at which the projects' NPV profiles cross is less than the projects' cost of capital.

Accepted Answer

A) True 
 B)False

Question 16

Assuming that their NPVs based on the firm's cost of capital are equal, the NPV of a project whose cash flows accrue relatively rapidly will be more sensitive to changes in the discount rate than the NPV of a project whose cash flows come in later in its life.

Accepted Answer

A) True 
 B)False

Question 17

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

Question 18

Which of the following statements is CORRECT?

Accepted Answer

A)   If two projects are mutually exclusive, then they are likely to have multiple IRRs.
B)   If a project is independent, then it cannot have multiple IRRs.
C)   Multiple IRRs can occur only if the signs of the cash flows change more than once.
D)   If a project has two IRRs, then the smaller one is the one that is most relevant, and it should be accepted and relied upon.
E)   For a project to have more than one IRR, then both IRRs must be greater than the WACC.F) A) and E)
G) A) and D)

Question 19

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 compounding the cash inflows at the WACC to find the present value (PV) , then discounting the TV to find the IRR.
B)   If a project's IRR is smaller than the WACC, then its NPV will be positive.
C)   A project's IRR is the discount rate that causes the PV of the inflows to equal the project's cost.
D)   If a project's IRR is positive, then its NPV must also be positive.
E)   A project's regular IRR is found by compounding the initial cost at the WACC to find the terminal value (TV) , then discounting the TV at the WACC.F) C) and E)
G) B) and C)

Exam 12: Capital Budgeting

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

primary reason that the NPV method is conceptually superior to the IRR method for evaluating mutually exclusive investments is that multiple IRRs may exist, and when that happens, we don't know which IRR is relevant.

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

the regular and the modified IRR (MIRR) methods have wide appeal to professors, but most business executives prefer the NPV method to either of the IRR methods.

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Assuming that their NPVs based on the firm's cost of capital are equal, the NPV of a project whose cash flows accrue relatively rapidly will be more sensitive to changes in the discount rate than the NPV of a project whose cash flows come in later in its life.

Correct Answer
verified

NPV and IRR methods, when used to evaluate two independent and equally risky projects, will lead to different accept/reject decisions and thus capital budgets if the projects' IRRs are greater than their cost of capital.

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

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

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

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

Correct Answer
verified

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

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

Correct Answer
verified

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
verified

Which of the following statements is CORRECT?

Correct Answer
verified

conflict will exist between the NPV and IRR methods, when used to evaluate two equally risky but mutually exclusive projects, if the projects' cost of capital exceeds the rate at which the projects' NPV profiles cross.

Correct Answer
verified

NPV and IRR methods, when used to evaluate two equally risky but mutually exclusive projects, will lead to different accept/reject decisions and thus capital budgets if the cost of capital at which the projects' NPV profiles cross is less than the projects' cost of capital.

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Exam 12: Capital Budgeting

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

primary reason that the NPV method is conceptually superior to the IRR method for evaluating mutually exclusive investments is that multiple IRRs may exist, and when that happens, we don't know which IRR is relevant.

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

the regular and the modified IRR (MIRR) methods have wide appeal to professors, but most business executives prefer the NPV method to either of the IRR methods.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Assuming that their NPVs based on the firm's cost of capital are equal, the NPV of a project whose cash flows accrue relatively rapidly will be more sensitive to changes in the discount rate than the NPV of a project whose cash flows come in later in its life.

Correct AnswerverifiedShow Answer

NPV and IRR methods, when used to evaluate two independent and equally risky projects, will lead to different accept/reject decisions and thus capital budgets if the projects' IRRs are greater than their cost of capital.

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

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

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

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

Correct AnswerverifiedShow Answer

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 AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

conflict will exist between the NPV and IRR methods, when used to evaluate two equally risky but mutually exclusive projects, if the projects' cost of capital exceeds the rate at which the projects' NPV profiles cross.

Correct AnswerverifiedShow Answer

NPV and IRR methods, when used to evaluate two equally risky but mutually exclusive projects, will lead to different accept/reject decisions and thus capital budgets if the cost of capital at which the projects' NPV profiles cross is less than the projects' cost of capital.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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