Q&A Hero

Q: Which of the following statements is CORRECT? a. An example of a sunk cost is the cost associated with restoring the site of a strip mine once the ore has been depleted. b. Sunk costs must be considered if the IRR method is used but not if the firm relies on the NPV method. c. A good example of a sunk cost is a situation where a bank opens a new office, and that new office leads to a decline in deposits of the banks other offices. d. A good example of a sunk cost is money that a banking corporation spent last year to investigate the site for a new office, then expensed that cost for tax purposes, and now is deciding whether to go forward with the project. e. If sunk costs are considered and reflected in a projects cash flows, then the projects calculated NPV will be higher than it otherwise would have been had the sunk costs been ignored.

Q: Which of the following statements is CORRECT? a. A sunk cost is any cost that must be expended in order to complete a project and bring it into operation. b. A sunk cost is any cost that was expended in the past but can be recovered if the firm decides not to go forward with the project. c. A sunk cost is a cost that was incurred and expensed in the past and cannot be recovered if the firm decides not to go forward with the project. d. Sunk costs were formerly hard to deal with, but once the NPV method came into wide use, it became possible to simply include sunk costs in the cash flows and then calculate the projects NPV. e. A good example of a sunk cost is a situation where Home Depot opens a new store, and that leads to a decline in sales of one of the firms existing stores.

Q: Suppose Tapley Inc. uses a WACC of 8% for below-average risk projects, 10% for average-risk projects, and 12% for above-average risk projects. Which of the following independent projects should Tapley accept, assuming that the company uses the NPV method when choosing projects? a. Project A, which has average risk and an IRR = 9%. b. Project B, which has below-average risk and an IRR = 8.5%. c. Project C, which has above-average risk and an IRR = 11%. d. Without information about the projects' NPVs we cannot determine which one or ones should be accepted. e. All of these projects should be accepted as they will produce a positive NPV.

Q: The relative risk of a proposed project is best accounted for by which of the following procedures? a. Adjusting the discount rate upward if the project is judged to have above-average risk. b. Adjusting the discount rate upward if the project is judged to have below-average risk. c. Reducing the NPV by 10% for risky projects. d. Picking a risk factor equal to the average discount rate. e. Ignoring risk because project risk cannot be measured accurately.

Q: Which of the following is NOT a relevant cash flow and thus should NOT be reflected in the analysis of a capital budgeting project? a. Changes in net operating working capital. b. Shipping and installation costs for machinery acquired. c. Cannibalization effects. d. Opportunity costs. e. Sunk costs that have been expensed for tax purposes.

Q: Sensitivity analysis measures a project's stand-alone risk by showing how much the project's NPV (or IRR) is affected by a small change in one of the input variables, say sales. Other things held constant, with the size of the independent variable graphed on the horizontal axis and the NPV on the vertical axis, the steeper the graph of the relationship line, the more risky the project, other things held constant. a. True b. False

Q: The change in net operating working capital (NOWC) associated with new projects is always positive, because new projects mean that more operating working capital will be required. a. True b. False

Q: Suppose Walker Publishing Company is considering bringing out a new finance text whose projected revenues include some revenues that will be taken away from another of Walker's books. The lost sales on the older book are a sunk cost and as such should not be considered in the analysis for the new book. a. True b. False

Q: Opportunity costs include those cash inflows that could be generated from assets the firm already owns if those assets are not used for the project being evaluated. a. True b. False

Q: The two cardinal rules that financial analysts should follow to avoid errors are: (1) in the NPV equation, the numerator should use income calculated in accordance with generally accepted accounting principles, and (2) all incremental cash flows should be considered when making accept/reject decisions for capital budgeting projects. a. True b. False

Q: It is extremely difficult to estimate the revenues and costs associated with large, complex projects that take several years to develop. This is why subjective judgment is often used for such projects along with discounted cash flow analysis. a. True b. False

Q: Superior analytical techniques, such as NPV, used in combination with risk-adjusted cost of capital estimates, can overcome the problem of poor cash flow estimation and lead to generally correct accept/reject decisions for capital budgeting projects. a. True b. False

Q: If a firm's projects differ in risk, then one way of handling this problem is to evaluate each project with the appropriate risk-adjusted discount rate. a. True b. False

Q: Immediate expensing of depreciation has an advantage for profitable firms in that it moves cash flows forward, thus increasing their present value. On the other hand, in the year that depreciation is immediately expensed the reported current year's profits are lower because of the higher depreciation expenses. However, the reported profits problem can be solved by using different depreciation methods for tax and stockholder reporting purposes. a. True b. False

Q: A firm that bases its capital budgeting decisions on either NPV or IRR will be more likely to accept a given project if it immediately expenses depreciation than if it uses straight-line depreciation, other things being equal. a. True b. False

Q: Typically, a project will have a higher NPV if the firm immediately expenses depreciation rather than using straight-line depreciation. This is because the total cash flows over the project's life will be higher if depreciation is immediately expensed, other things held constant. a. True b. False

Q: The primary advantage to immediately expensing depreciation rather than using straight-line depreciation is that with immediate expensing the present value of the tax savings provided by depreciation will be higher, other things held constant. a. True b. False

Q: The primary advantage to immediately expensing depreciation rather than using straight-line depreciation is that with immediate expensing the total amount of depreciation that can be taken, assuming the asset is used for its full tax life, is greater. a. True b. False

Q: Changes in net operating working capital should not be reflected in a capital budgeting cash flow analysis because capital budgeting relates to fixed assets, not working capital. a. True b. False

Q: Suppose a firm's CFO thinks that an externality is present in a project, but that it cannot be quantified with any precision--estimates of its effect would really just be guesses. In this case, the externality should be ignored--i.e., not considered at all--because if it were considered it would make the analysis appear more precise than it really is. a. True b. False

Q: In cash flow estimation, the existence of externalities should be taken into account if those externalities have any effects on the firm's long-run cash flows. a. True b. False

Q: We can identify the cash costs and cash inflows to a company that will result from a project. These could be called "direct inflows and outflows," and the net difference is the direct net cash flow. If there are other costs and benefits that do not flow from or to the firm, but to other parties, these are called externalities, and they need not be considered as a part of the capital budgeting analysis. a. True b. False

Q: Any cash flows that can be classified as incremental to a particular project--i.e., results directly from the decision to undertake the project--should be reflected in the capital budgeting analysis. a. True b. False

Q: If debt is to be used to finance a project, then when cash flows for a project are estimated, interest payments should be included in the analysis. a. True b. False

Q: If an investment project would make use of land which the firm currently owns, the project should be charged with the opportunity cost of the land. a. True b. False

Q: Since the focus of capital budgeting is on cash flows rather than on net income, changes in noncash balance sheet accounts such as inventory are not included in a capital budgeting analysis. a. True b. False

Q: Although it is extremely difficult to make accurate forecasts of the revenues that a project will generate, projects' initial outlays and subsequent costs can be forecasted with great accuracy. This is especially true for large product development projects. a. True b. False

Q: Estimating project cash flows is generally the most important, but also the most difficult, step in the capital budgeting process. Methodology, such as the use of NPV versus IRR, is important, but less so than obtaining a reasonably accurate estimate of projects' cash flows. a. True b. False

Q: Because of improvements in forecasting techniques, estimating the cash flows associated with a project has become the easiest step in the capital budgeting process. a. True b. False

Q: Noe Drilling 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, i.e., 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. WACC: 9.00% u200b u200b u200b u200b u200b 0 1 2 3 4 CFS-$1,100 $550 $600 $100 $100 CFL-$2,750 $725 $725 $800 $1,400 u200b a. $92.69 b. $62.57 c. $0.00 d. $95.01 e. $78.79

Q: Yonan Inc. 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. WACC: 10.00% 0 1 2 3 4 CFS-$950 $500 $800 $0 $0 CFL-$2,100 $400 $800 $800 $1,000 a. $35.82 b. $43.16 c. $53.08 d. $51.36 e. $38.41

Q: 90 861.37 790.25 725.00 $3,315.52 10.80% MIRR, L 10.80% u200b MIRR, S 11.74% u200b NPV, L $148.80 u200b NPV, S u200b $33.90 = Value lost if use the MIRR criterion u200b u200b Note that the WACC is be a conflict between NPV and IRR, hence following the MIRR rule may not result in a loss of value. In that case, the correct answer is $33.90. u200b LOCAL STANDARDS: United States - OH - Default City - N/A - Since we still do not have the Cengage Business School Outcomes, you do not need to include anything for this category.

Q: Nast Inc. 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 higher MIRR rather than the one with the higher NPV, how much value will be forgone? Note that under some conditions choosing projects on the basis of the MIRR will cause $0.00 value to be lost. WACC: 9.00% 0 1 2 3 4 CFS-$1,100 $375 $375 $375 $375 CFL-$2,200 $725 $725 $725 $725 a. $34.24 b. $26.78 c. $33.90 d. $27.80 e. $25.77

Q: Kosovski 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. WACC: 6.25% 0 1 2 3 4 CFS-$1,050 $675 $650 CFL-$1,050 $360 $360 $360 $360 a. $29.26 b. $23.11 c. $32.18 d. $32.77 e. $25.45

Q: Moerdyk & 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 higher IRR, how much value will be forgone? Note that under certain conditions choosing projects on the basis of the IRR will not cause any value to be lost because the one with the higher IRR will also have the higher NPV, i.e., no conflict will exist. WACC: 7.75% 0 1 2 3 4 CFS-$1,025 $650 $450 $250 $50 CFL-$1,025 $100 $300 $500 $700 a. $35.63 b. $42.42 c. $40.30 d. $50.06 e. $52.18

Q: Sexton Inc. 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 higher IRR, how much value will be forgone? Note that under certain conditions choosing projects on the basis of the IRR will not cause any value to be lost because the one with the higher IRR will also have the higher NPV, so no value will be lost if the IRR method is used. WACC: 10.25% 0 1 2 3 4 CFS-$2,050 $750 $760 $770 $780 CFL-$4,300 $1,500 $1,518 $1,536 $1,554 a. $149.36 b. $185.20 c. $132.93 d. $186.69 e. $129.94

Q: A firm 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 the firm on the best procedure. If the wrong decision criterion is used, how much potential value would the firm lose? WACC: 11.75% 0 1 2 3 4 CFS-$1,025 $380 $380 $380 $380 CFL-$2,150 $765 $765 $765 $765 a. $45.51 b. $50.56 c. $62.70 d. $57.64 e. $45.00

Q: Tesar Chemicals 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 NPV. If the decision is made by choosing the project with the higher IRR rather than the one with the higher NPV, how much, if any, value will be forgone, i.e., what's the chosen NPV versus the maximum possible NPV? Note that (1) "true value" is measured by NPV, and (2) under some conditions the choice of IRR vs. NPV will have no effect on the value gained or lost. WACC: 8.75% 0 1 2 3 4 CFS-$1,100 $550 $600 $100 $100 CFL-$2,700 $650 $725 $800 $1,400 a. $79.93 b. $70.65 c. $71.36 d. $88.49 e. $68.51

Q: Masulis Inc. is considering a project that has the following cash flow and WACC data. What is the project's discounted payback? WACC: 10.00% Year 0 1 2 3 4 Cash flows -$1,300 $525 $485 $445 $405 a. 2.62 years b. 3.32 years c. 2.75 years d. 3.42 years e. 3.05 years

Q: Fernando Designs is considering a project that has the following cash flow and WACC data. What is the project's discounted payback? WACC: 10.00% Year 0 1 2 3 Cash flows -$750 $500 $500 $500 a. 1.53 years b. 1.29 years c. 1.56 years d. 1.72 years e. 1.61 years

Q: Stern Associates is considering a project that has the following cash flow data. What is the project's payback? Year 0 1 2 3 4 5 Cash flows -$1,000 $300 $310 $320 $330 $340 a. 2.89 years b. 2.92 years c. 3.40 years d. 3.21 years e. 3.92 years

Q: Hindelang Inc. is considering a project that has the following cash flow and WACC data. What is the project's MIRR? Note that a project's projected MIRR can be less than the WACC (and even negative), in which case it will be rejected. WACC: 11.50% Year 0 1 2 3 4 Cash flows -$850 $300 $320 $340 $360 a. 19.67% b. 17.23% c. 16.26% d. 15.77% e. 16.91%

Q: Malholtra Inc. is considering a project that has the following cash flow and WACC data. What is the project's MIRR? Note that a project's projected MIRR can be less than the WACC (and even negative), in which case it will be rejected. WACC: 10.00% Year 0 1 2 3 4 Cash flows -$975 $300 $320 $340 $360 a. 13.04% b. 9.16% c. 14.10% d. 11.98% e. 11.75%

Q: Ingram Electric Products is considering a project that has the following cash flow and WACC data. What is the project's MIRR? Note that a project's projected MIRR can be less than the WACC (and even negative), in which case it will be rejected. WACC: 9.75% Year 0 1 2 3 Cash flows -$800 $350 $350 $350 a. 11.48% b. 10.57% c. 13.05% d. 15.00% e. 14.35%

Q: Ehrmann Data Systems is considering a project that has the following cash flow and WACC data. What is the project's MIRR? Note that a project's projected MIRR can be less than the WACC (and even negative), in which case it will be rejected. WACC: 9.75% Year 0 1 2 3 Cash flows -$1,000 $450 $450 $450 a. 14.11% b. 15.52% c. 15.81% d. 10.72% e. 17.22%

Q: Lasik Vision Inc. recently analyzed the project whose cash flows are shown below. However, before Lasik decided to accept or reject the project, the Federal Reserve took actions that changed interest rates and therefore the firm's WACC. The Fed's action did not affect the forecasted cash flows. By how much did the change in the WACC affect the project's forecasted NPV? Note that a project's projected NPV can be negative, in which case it should be rejected. Old WACC: 8.00% New WACC: 8.25% Year 0 1 2 3 Cash flows -$1,000 $410 $410 $410 a. -$3.66 b. -$4.27 c. -$4.75 d. -$5.46 e. -$5.18

Q: Last month, Lloyd's Systems analyzed the project whose cash flows are shown below. However, before the decision to accept or reject the project, the Federal Reserve took actions that changed interest rates and therefore the firm's WACC. The Fed's action did not affect the forecasted cash flows. By how much did the change in the WACC affect the project's forecasted NPV? Note that a project's projected NPV can be negative, in which case it should be rejected. Old WACC: 10.00% New WACC: 8.00% Year 0 1 2 3 Cash flows -$1,000 $410 $410 $410 a. $37.00 b. $38.48 c. $32.19 d. $40.70 e. $44.03

Q: Maxwell Feed & Seed is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's projected IRR can be less than the WACC (and even negative), in which case it will be rejected. Year 0 1 2 3 4 5 Cash flows -$6,250 $2,000 $2,025 $2,050 $2,075 $2,100 a. 18.18% b. 23.11% c. 17.62% d. 18.94% e. 14.40%

Q: Simkins Renovations Inc. is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's projected IRR can be less than the WACC (and even negative), in which case it will be rejected. Year 0 1 2 3 4 Cash flows -$825 $300 $290 $280 $270 u200b a. 13.59% b. 17.24% c. 11.40% d. 15.20% e. 14.61%

Q: Datta Computer Systems is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's projected IRR can be less than the WACC (and even negative), in which case it will be rejected. Year 0 1 2 3 Cash flows -$1,250 $450 $470 $490 u200b a. 5.01% b. 5.50% c. 5.99% d. 6.67% e. 6.18%

Q: Barry Company is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that a project's projected NPV can be negative, in which case it will be rejected. WACC: 10.25% Year 0 1 2 3 4 5 Cash flows -$1,100 $400 $390 $380 $370 $360 a. $338.67 b. $399.63 c. $301.41 d. $274.32 e. $413.17

Q: Jazz World Inc. is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that a project's projected NPV can be negative, in which case it will be rejected. WACC: 12.00% Year 0 1 2 3 4 Cash flows -$1,200 $400 $425 $450 $475 a. $119.30 b. $118.12 c. $113.40 d. $121.67 e. $135.84

Q: Warnock Inc. is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that a project's projected NPV can be negative, in which case it will be rejected. WACC: 10.00% Year 0 1 2 3 Cash flows -$1,050 $500 $400 $300 a. -$42.25 b. -$30.01 c. -$34.35 d. -$48.96 e. -$39.48

Q: Cornell Enterprises is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that a project's projected NPV can be negative, in which case it will be rejected. WACC: 10.00% Year 0 1 2 3 Cash flows -$825 $450 $460 $470 a. $269.77 b. $317.37 c. $377.68 d. $339.59 e. $345.94

Q: Mansi Inc. is considering a project that has the following cash flow data. What is the project's payback? Year 0 1 2 3 Cash flows -$650 $300 $325 $350 a. 1.80 years b. 1.78 years c. 1.95 years d. 2.07 years e. 1.66 years

Q: Susmel Inc. is considering a project that has the following cash flow data. What is the project's payback? Year 0 1 2 3 Cash flows -$500 $150 $200 $300 a. 2.50 years b. 1.90 years c. 2.63 years d. 1.93 years e. 2.40 years

Q: Resnick Inc. is considering a project that has the following cash flow data. What is the project's payback? Year 0 1 2 3 Cash flows -$400 $200 $200 $200 a. 2.16 years b. 2.28 years c. 2.02 years d. 2.12 years e. 2.00 years

Q: Taggart Inc. is considering a project that has the following cash flow data. What is the project's payback? Year 0 1 2 3 Cash flows -$925 $500 $500 $500 a. 1.85 years b. 1.42 years c. 1.96 years d. 2.29 years e. 1.79 years

Q: Thorley Inc. is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's projected IRR can be less than the WACC or negative, in both cases it will be rejected. Year 0 1 2 3 4 5 Cash flows -$1,500 $325 $325 $325 $325 $325 u200b a. 2.73% b. 2.87% c. 2.13% d. 2.95% e. 2.46%

Q: Warr Company is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's projected IRR can be less than the WACC or negative, in both cases it will be rejected. u200b Year 0 1 2 3 4 Cash flows -$1,415 $400 $400 $400 $400 u200b a. 3.98% b. 5.00% c. 5.10% d. 5.61% e. 6.33%

Q: Simms Corp. is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's projected IRR can be less than the WACC or negative, in both cases it will be rejected. Year 0 1 2 3 Cash flows -$1,125 $425 $425 $425 a. 4.96% b. 5.81% c. 7.12% d. 6.14% e. 6.53%

Q: Harry's Inc. is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that if a project's projected NPV is negative, it should be rejected. WACC: 13.25% Year 0 1 2 3 4 5 Cash flows -$1,000 $300 $300 $300 $300 $300 a. 52.18 b. 49.25 c. 48.76 d. 41.45 e. 55.10

Q: Tuttle Enterprises is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that if a project's projected NPV is negative, it should be rejected. WACC: 14.50% Year 0 1 2 3 4 Cash flows -$1,000 $350 $350 $350 $350 a. 8.11 b. 11.42 c. 8.77 d. 9.91 e. 9.43

Q: Anderson Systems is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that if a project's projected NPV is negative, it should be rejected. WACC: 12.50% Year 0 1 2 3 Cash flows -$1,000 $500 $500 $500 a. 209.74 b. 165.88 c. 184.95 d. 190.67 e. 188.77

Q: Projects A and B are mutually exclusive and have normal cash flows. Project A has an IRR of 15% and B's IRR is 20%. The companys WACC is 12%, and at that rate Project A has the higher NPV. Which of the following statements is CORRECT? a. The crossover rate for the two projects must be less than 12%. b. Assuming the timing pattern of the two projects cash flows is the same, Project B probably has a higher cost (and larger scale). c. Assuming the two projects have the same scale, Project B probably has a faster payback than Project A. d. The crossover rate for the two projects must be 12%. e. Since B has the higher IRR, then it must also have the higher NPV if the crossover rate is less than the WACC of 12%.

Q: McCall Manufacturing has a WACC of 10%. The firm is considering two normal, equally risky, mutually exclusive, but not repeatable projects. 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? a. Each project must have a negative NPV. b. Since the projects are mutually exclusive, the firm should always select Project B. c. If the crossover rate is 8%, Project B will have the higher NPV. d. Only one project has a positive NPV. e. If the crossover rate is 8%, Project A will have the higher NPV.

Q: A 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 $51,600, annual cash flows of $16,000 for 5 years, and an IRR of 16.65%. The projects are equally risky. Which of the following statements is CORRECT? a. 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 WACC. b. 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 WACC. c. 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 WACC is. d. 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 WACC is less than the crossover rate. e. 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 WACC is less than the crossover rate.

Q: Which of the following statements is CORRECT? Assume that all projects being considered have normal cash flows and are equally risky. a. If a projects IRR is equal to its WACC, then, under all reasonable conditions, the projects NPV must be negative. b. If a projects IRR is equal to its WACC, then under all reasonable conditions, the projects IRR must be negative. c. If a projects IRR is equal to its WACC, then under all reasonable conditions the projects NPV must be zero. d. There is no necessary relationship between a projects IRR, its WACC, and its NPV. e. When evaluating mutually exclusive projects, those projects with relatively long lives will tend to have relatively high NPVs when the cost of capital is relatively high.

Q: Projects S and L both have normal cash flows, and the projects have the same risk, hence both are evaluated with the same WACC, 10%. However, S has a higher IRR than L. Which of the following statements is CORRECT? a. Project S must have a higher NPV than Project L. b. If Project S has a positive NPV, Project L must also have a positive NPV. c. If the WACC falls, each projects IRR will increase. d. If the WACC increases, each projects IRR will decrease. e. If Projects S and L have the same NPV at the current WACC, 10%, then Project L, the one with the lower IRR, would have a higher NPV if the WACC used to evaluate the projects declined.

Q: 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. a. A projects MIRR is always greater than its regular IRR. b. A projects MIRR is always less than its regular IRR. c. If a projects IRR is greater than its WACC, then the MIRR will be less than the IRR. d. If a projects IRR is greater than its WACC, then the MIRR will be greater than the IRR. e. To find a projects MIRR, we compound cash inflows at the IRR and then discount the terminal value back to t = 0 at the WACC.

Q: 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. a. A projects MIRR is always greater than its regular IRR. b. A projects MIRR is always less than its regular IRR. c. If a projects IRR is greater than its WACC, then its MIRR will be greater than the IRR. d. To find a projects 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. e. To find a projects 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.

Q: You are on the staff of Camden Inc. The CFO believes project acceptance should be based on the NPV, but Steve Camden, the president, insists that no project should be accepted unless its IRR exceeds the projects risk-adjusted WACC. Now you must make a recommendation on a project that has a cost of $15,000 and two cash flows: $110,000 at the end of Year 1 and -$100,000 at the end of Year 2. The president and the CFO both agree that the appropriate WACC for this project is 10%. At 10%, the NPV is $2,355.37, but you find two IRRs, one at 6.33% and one at 527.01%, and a MIRR of 11.32%. Which of the following statements best describes your optimal recommendation, i.e., the analysis and recommendation that is best for the company and least likely to get you in trouble with either the CFO or the president? a. You should recommend that the project be rejected because its NPV is negative and its IRR is less than the WACC. b. You should recommend that the project be rejected because, although its NPV is positive, it has an IRR that is less than the WACC. c. You should recommend that the project be accepted because (1) its NPV is positive and (2) although it has two IRRs, in this case it would be better to focus on the MIRR, which exceeds the WACC. You should explain this to the president and tell him that that the firms value will increase if the project is accepted. d. You should recommend that the project be rejected because (1) its NPV is positive and (2) it has two IRRs, one of which is less than the WACC, which indicates that the firms value will decline if the project is accepted. e. You should recommend that the project be rejected because, although its NPV is positive, its MIRR is less than the WACC, and that indicates that the firms value will decline if it is accepted.

Q: Project Xs IRR is 19% and Project Ys IRR is 17%. The projects have the same risk and the same lives, and each has constant cash flows during each year of their lives. If the WACC is 10%, Project Y has a higher NPV than X. Given this information, which of the following statements is CORRECT? a. The crossover rate must be less than 10%. b. The crossover rate must be greater than 10%. c. If the WACC is 8%, Project X will have the higher NPV. d. If the WACC is 18%, Project Y will have the higher NPV. e. Project X is larger in the sense that it has the higher initial cost.

Q: You are considering two mutually exclusive, equally risky, projects. Both have IRRs that exceed the WACC. Which of the following statements is CORRECT? Assume that the projects have normal cash flows, with one outflow followed by a series of inflows. a. If the two projects' NPV profiles do not cross, then there will be a sharp conflict as to which one should be selected. b. If the cost of capital is greater than the crossover rate, then the IRR and the NPV criteria will not result in a conflict between the projects. One project will rank higher by both criteria. c. If the cost of capital is less than the crossover rate, then the IRR and the NPV criteria will not result in a conflict between the projects. One project will rank higher by both criteria. d. For a conflict to exist between NPV and IRR, the initial investment cost of one project must exceed the cost of the other. e. For a conflict to exist between NPV and IRR, one project must have an increasing stream of cash flows over time while the other has a decreasing stream. If both sets of cash flows are increasing or decreasing, then it would be impossible for a conflict to exist, even if one project is larger than the other.

Q: Westchester Corp. is considering two equally risky, mutually exclusive projects, both of which have normal cash flows. Project A has an IRR of 11%, while Project B's IRR is 14%. When the WACC is 8%, the projects have the same NPV. Given this information, which of the following statements is CORRECT? a. If the WACC is 13%, Project As NPV will be higher than Project Bs. b. If the WACC is 9%, Project As NPV will be higher than Project Bs. c. If the WACC is 6%, Project Bs NPV will be higher than Project As. d. If the WACC is greater than 14%, Project As IRR will exceed Project Bs. e. If the WACC is 9%, Project Bs NPV will be higher than Project As.

Q: Projects S and L are equally risky, mutually exclusive, and have normal cash flows. Project S has an IRR of 15%, while Project Ls IRR is 12%. The two projects have the same NPV when the WACC is 7%. Which of the following statements is CORRECT? a. If the WACC is 10%, both projects will have positive NPVs. b. If the WACC is 6%, Project S will have the higher NPV. c. If the WACC is 13%, Project S will have the lower NPV. d. If the WACC is 10%, both projects will have a negative NPV. e. Project Ss NPV is more sensitive to changes in WACC than Project L's.

Q: Which of the following statements is CORRECT? a. The IRR method appeals to some managers because it gives an estimate of the rate of return on projects rather than a dollar amount, which the NPV method provides. b. The discounted payback method eliminates all of the problems associated with the payback method. c. When evaluating independent projects, the NPV and IRR methods often yield conflicting results regarding a project's acceptability. d. To find the MIRR, we discount the TV at the IRR. e. A projects NPV profile must intersect the X-axis at the projects WACC.

Q: Which of the following statements is CORRECT? a. One advantage of the NPV over the IRR is that NPV takes account of cash flows over a projects full life whereas IRR does not. b. One advantage of the NPV over the IRR is that NPV assumes that cash flows will be reinvested at the WACC, whereas IRR assumes that cash flows are reinvested at the IRR. The NPV assumption is generally more appropriate. c. One advantage of the NPV over the MIRR method is that NPV takes account of cash flows over a projects full life whereas MIRR does not. d. One advantage of the NPV over the MIRR method is that NPV discounts cash flows whereas the MIRR is based on undiscounted cash flows. e. Since cash flows under the IRR and MIRR are both discounted at the same rate (the WACC), these two methods always rank mutually exclusive projects in the same order.

Q: Which of the following statements is CORRECT? a. For a project with normal cash flows, any change in the WACC will change both the NPV and the IRR. b. 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 WACC to find the PV. c. The NPV and IRR methods both assume that cash flows can be reinvested at the WACC. However, the MIRR method assumes reinvestment at the MIRR itself. d. 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. e. 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.

Q: Which of the following statements is CORRECT? a. The NPV, IRR, MIRR, and discounted payback (using a payback requirement of 3 years or less) methods always lead to the same accept/reject decisions for independent projects. b. For mutually exclusive projects with normal cash flows, the NPV and MIRR methods can never conflict, but their results could conflict with the discounted payback and the regular IRR methods. c. Multiple IRRs can exist, but not multiple MIRRs. This is one reason some people favor the MIRR over the regular IRR. d. If a firm uses the discounted payback method with a required payback of 4 years, then it will accept more projects than if it used a regular payback of 4 years. e. The percentage difference between the MIRR and the IRR is equal to the projects WACC.