test 3 mc
Sacramento Paper is considering two mutually exclusive projects. Project A has an internal rate of return (IRR) of 15%, while Project B has an IRR of 12%. The two projects have the same risk, the same cost, and when the cost of capital (discount rate) is 9% the projects have the same NPV. Assume that both projects have an initial cash outflow followed by a series of positive cash inflows. Given this information, which of the following statements is correct? A. If the cost of capital is 12%, Project B's NP will be higher than Project A's NPV. B. If the cost of capital is 7%, Project B's NPV will be higher than Project A's NPV. C. Project A should be accepted and project B should be rejected regardless of the cost of capital. D. two of the above are correct. E. none of the above (a-c) are correct.
A. If the cost of capital is 12%, Project B's NP will be higher than Project A's NPV.
O'Leary Lumber Company is considering two mutually exclusive projects, Project X and Project Y. The two projects have normal cash flows (an up-front cost followed by a series of positive cash flows), the same risk, and the same 10 percent cost of capital (required return). However, Project X has an IRR of 16 percent and Project Y has an IRR of 14 percent. Which of the following statements is most correct? A. Project X's NPV must be positive. B. Project X's NPV must be higher than Project Y's NPV. C. If project X has a lower NPV than Project Y, then this means that Project X must be a larger (higher initial cost) project. D. more than one of the above E. none of the above
A. Project X's NPV must be positive.
Which of the following statements is the most correct? A. The rate of depreciation will often affect the incremental annual cash flows for a capital budgeting project even though depreciation itself is not a cash flow. B. In the analysis of capital budgeting projects, the interest expense from any debt that is used to fund the project should not be included in the annual cash flows of the project. C. In a firm with taxable income greater than zero, switching from straight-line to accelerated depreciation for a capital budgeting project will increase the project's NPV, other things equal. D. Two of the above are correct. E. all of the above are correct.
A. The rate of depreciation will often affect the incremental annual cash flows for a capital budgeting project even though depreciation itself is not a cash flow.
Assume a project has normal cash flows (that is, initial cash flow is negative, and all other cash flows are positive). Which of the following statements is most correct? A. all else equal, the project's NPV increases as the cost of capital declines B. All else equal, the project's IRR increases as the cost of capital declines C. All else equal, the project's discount rate increases as the cost of capital decreases. D. statements A and B are correct E. statements B and C are correct
A. all else equal, the project's NPV increases as the cost of capital declines
Which of the following statements is most correct? A. if a project's internal rate of return (IRR) exceeds the cost of capital, then the project's net present value must be positive. B. if Project A has a higher IRR than Project B, then project A must also have a higher NPV C. The IRR calculation implicitly assumes that all cash flows are reinvested at a rate of return equal to the cost of capital. D. more than one of the above E. none of the above
A. if a project's internal rate of return (IRR) exceeds the cost of capital, then the project's net present value must be positive.
A company is considering a proposed expansion to its facilities. Which of the following statement is the most correct? A. in calculating the project's operating cash flows, the firm should not subtract out the financing costs such as interest expense, since these costs are already included in the cost of capital which is used to discount the project's net cash flows B. since depreciation is a non-cash expense, the firm does not need to know the depreciation rate when calculating the operating cash flows. C. when estimating the project's operating cash flows, it is important to include any opportunity and sunk costs. D. more than one of the above E. none of the above
A. in calculating the project's operating cash flows, the firm should not subtract out the financing costs such as interest expense, since these costs are already included in the cost of capital which is used to discount the project's net cash flows
In the total initial outlay for a replacement project, the tax effect on the sale of the old asset will represent a positive cash flow A. its book value is greater than its market value B. its book value is less than its market value C. always D. never
A. its book value is greater than its market value
In the total initial outlay for a replacement project, the tax effect on the sale of the old asset will represent a positive cash flow if: A. its book value is greater than its market value B. its book value is less than its market value C. always D. never
A. its book value is greater than its market value
Which of the following statements is (are) true? A. The ATSV (after-tax salvage value) of a depreciable asset that is sold is always the selling price x (1 - tax rate) B. The ATSV of a depreciable asset that is sold is sometimes the selling price x (1 - tax rate) C. The ATSV is a depreciable asset is always (Selling price - Book value) x (1 - tax rate) D. A and C E. B and C F. None of the above are correct
B. The ATSV of a depreciable asset that is sold is sometimes the selling price x (1 - tax rate)
Which of the following statements is (are) correct? A. The MIRR method assumes that cash flows are reinvested at the firm's borrowing rate, while the IRR method assumers reinvestment at the IRR. B. The MIRR method assumes that cash flows are reinvested at the firm's cost of capital, while the IRR method assumes reinvestment at the IRR. C. The MIRR will always be less than the IRR for any project. D. Statements A and C are correct. E. Statements B and C are correct.
B. The MIRR method assumes that cash flows are reinvested at the firm's cost of capital, while the IRR method assumes reinvestment at the IRR.
Which of the following statements is correct? A. In the analysis of capital budgeting projects, the interest expense from any debt that is used to fund the project is a cash flow that should be included in the annual cash flow of the project. B. The rate of depreciation will often affect the incremental cash flows for a capital budgeting project, even though depreciation is not itself a cash flow. C. Every capital budgeting project has not more than one internal rate of return. D. two of the above E. none of the above
B. The rate of depreciation will often affect the incremental cash flows for a capital budgeting project, even though depreciation is not itself a cash flow.
In the total initial outlay for a replacement project, the change in net working capital will be a positive cash flow A. if the amount of the new asset's NWC investment is greater than the old asset's NWC investment. B. if the amount of the new asset's NWC investment is less than the old asset's NWC investment. C. always D. never
B. if the amount of the new asset's NWC investment is less than the old asset's NWC investment.
In the total initial outlay for a replacement project, the tax effect on the sale of the old asset will represent a positive cash flow if: A. its book value is less than its market value B. its book value is greater than its market value C. always D. never E. two of the above are correct
B. its book value is greater than its market value
The ATSV for an asset that is sold is the selling proce x (1 - Tax Rate) A. only if the selling price is greater than the book value. B. only if the asset has been fully depreciated. C. always D. never
B. only if the asset has been fully depreciated
In a capital budgetting analysis for a replacement project decision, the difference between the depreciation on the new asset and the old asset in any year will result in an increase in taxable income in that year if: A. the depreciation on the new asset is greater than the depreciation on the old asset in that year. B. the depreciation on the new asset is less than the depreciation on the old asset in that year. C. always D. never E. two of the above are correct
B. the depreciation on the new asset is less than the depreciation on the old asset in that year.
Which of the following statements is most correct? A. The IRR calculation implicitly assumes that all cash flows are reinvested at a rate of return equal to the cost of capital. B. If Project A has a higher IRR than Project B, then Project A must also have a higher NPV. C. If a project's internal rate of return (IRR) exceeds the cost of capital, then the project's net present value must be positive. D. more than one of the above. E. none of the above
C. If a project's internal rate of return (IRR) exceeds the cost of capital, then the project's
Projects A and B both have normal cash flows. In other words, there is an up-front cost followed over time by a series of positive cash flows. Both projects have the same risk, and a 10% cost of capital (discount rate) is appropriate for both projects. At a 10% discount rate, Project B has a positive NPV. However, Project A has a higher MIRR than Project B. Which of the following statements is most correct? A. Project A must have a positive NPV. B. Project A must have a negative NPV. C. If the cost of capital for Project A falls, its discounted payback period will decrease. D. Answers A and C are correct. E. Answers B and C are correct.
C. If the cost of capital for Project A falls, its discounted payback period will decrease.
When conducting an NPV analysis on the cash flows of a new project, the firm should include all of the following cash flows EXCEPT: A. Changes in net working capital attributable to the project. B. Current rental income from a building owned by the firm that would be foregone if the building is used for the project. C. Previous expenditures associated with a market test to determine the feasibility of the project. D. The decline in sales of an existing product as a direct result of the sales of the new products from this project. E. All of the above should be included
C. Previous expenditures associated with a market test to determine the feasibility of the project.
Assume you are comparing two mutually exclusive projects. Which of the following statements is most correct? A. The NPV and IRR rules always lead to the same accept/reject decision unless one or both projects are "non-normal" in the sense of having more than one change in sign in the cash flow stream. B. If a conflict exists between the NPV and the IRR, the conflict can always be elimiated by dropping the IRR and replacing it with the MIRR. C. There will be a meaningful (as opposed to irrelevant) conflict between the two decision rules only if the projects' NPV profiles cross, and even then only if the cost of capital is lower than the discount rate at which the crossover occurs. D. Statements A and C are correct. E. Statements B and C are correct.
C. There will be a meaningful (as opposed to irrelevant) conflict between the two decision rules only if the projects' NPV profiles cross, and even then only if the cost of capital is lower than the discount rate at which the crossover occurs.
Assume you are comparing two mutually exclusive projects. Which of the following statements is most correct? A. The NPV and IRR rules will always lead to the same decision unless one or both projects are "non-normal" in the sense of having only one change in sign in the cash flow stream, that is, one or more initial cash outflows (the investment) followed by a series of cash inflows. B. If a conflict exists between the NPV and the IRR, the conflict can always be eliminated by dropping the IRR and replacing it with the MIRR. C. There will be a meaningful (as opposed to irrelevant) conflict between the two decision rules only if the projects' NPV profiles cross, and even then, only if the cost of capital is lower than the discount rate at which the crossover occurs. D. more than one of the above E. none of the above
C. There will be a meaningful (as opposed to irrelevant) conflict between the two decision rules only if the projects' NPV profiles cross, and even then, only if the cost of capital is lower than the discount rate at which the crossover occurs.
Which of the following statements is most correct? A. when used correctly, the MIRR method of project selection will always give the same accept/reject decision as the NPV method B. the MIRR method can overcome the multiple problems inherent in the IRR method of project selection, while the NPV method cannot overcome those problems C. the MIRR method uses a more reasonable assumption about reinvestment rates than the IRR method D. two of the above are correct E. all of the above (a-c) are correct
C. the MIRR method uses a more reasonable assumption about reinvestment rates than the IRR method
Assume that a project has normal cash flows (that is, the initial cash flow is negative and all other cash flows are positive). Which of the following statements is most correct? A. All else equal, the project's IRR increases as the cost of capital declines. B. All else equal, the project's IRR decreases as the cost of capital declines. C. The project has one and only one IRR. D. Statements A and C are correct. E. Statements B and C are correct.
C. the project has one and only one IRR
Projects A and B both have normal cash flows. In other words, there is an up-front cost followed over time by a series of positive cash flows. Both projects have the same risk, and a 10% cost of capital (discount rate) is appropriate for both projects. However, Project A has a higher IRR than Project B. Which of the following statements is most correct? A. Project A must have a higher net present value than Project B. B. If Project A has a positive NPV, then Project B must also have a positive NPV. C. If the cost of capital for Project A falls, its internal rate of return will increase. D. If both projects have the same NPV at a 10% discount rate, then Project B would have a higher NPV than Project A if the discount rate for both projects is less than 10%. E. more than one of the above is correct
D. If both projects have the same NPV at a 10% discount rate, then Project B would have a higher NPV than Project A if the discount rate for both projects is less than 10%.
When evaluating the cash flows of a new project, the firm should include all of the following EXCEPT: A. Changes in net working capital attributable to the project. B. Previous expenditures associated with a market test to determine the feasibility of the project. C. Current rental income from a building owned by the firm that would be foregone if the building is used for this project. D. The annual interest expense on the loan that was needed to pay for the project. E. all of the above should be included
D. The annual interest expense on the loan that was needed to pay for the project.
Which of the following statements is (are) true? A. The IRR is the discount rate the makes NPV equal zero. B. Because the discounted payback period takes account of the cost of capital in the discount rate, it provides a better consideration of the risk of the project's cash flows than the simple payback period. C. If the NPV of a project is positive, then the IRR of the investment must be greater than the discount rate used to computer the net present value. D. Two of the above are correct. E. All of the above are correct.
D. Two of the above are correct
In a capital budgetting analysis for a replacement project decision, the change in depreciation between the new asset and the old asset represents a positive annual cash flow A. if the depreciation on the new asset is greater than the depreciation on the old asset in any year. B. if the depreciation on the new asset is less than the depreciation on the old asset in any year. C. always D. never
D. never
Which of the following items should Bev's Beverage Inc. take into account when evaluating a proposed prune juice project? A. the company spent $300,000 two years ago to renovate its Cincinnati plant. These renovations were made in anticipation of another project that the company ultimately did not undertake. B. if the company did not proceed with the prune juice project, the Cincinnati plant could generate leasing income of $75,000 per year C. if the company proceeds with the prune juice project, it is estimated that sales of the company's apple juice will fall by 3% per year D. only B and C should be taken into account E. all of the above (a-c) should be taken into account
D. only B and C should be taken into account
A proposed project has normal cash flows. In other words, there is an up-front cost followed over time by a series of positive cash flows. The project's internal rate of return is 10% and its cost of capital (discount rate) is 12%. Which of the following statements is correct? A. The project's NPV must be negative. B. The project's MIRR must be greater than 10% but less than 12%. C. The project's payback period (if one exists) must be less than its discounted payback period (if it exists). D. Two of the above are correct. E. All of the above (a-c) are correct.
D. two of the above are correct
Which of the following statements is (are) true? A. The equivalent annual annuity (EAA) for a capital budgeting project is the average annual net present value that the project generates. B. In a capital budgeting analysis where part of the funds used to finance the project are raised as debt, failure to include interest expense as a cash outflow will lead to an upward bias in the NPV. C. Equipment that is sold for less than its book value at the end of a project's life will produce a reduction in the firm's overal tax expense that should be attributed to the project as a positive cash flow in its terminal year. D. two of the above are correct. E. all of the above are correct
D. two of the above are correct
Which of the following statements is most correct? A. The rate of depreciation will often affect the incremental annual cash flows for a capital budgeting project even though depreciation itself is not a cash flow. B. In the analysis of capital budgeting projects, the interest expense from any debt that is used to fund the project is a cash flow that should be included in the annual cash flows of the project. C. In a firm with taxable income greater than zero, switching from straight-line to accelerated depreciation for a capital budgeting project will increase the project's NPV, other things equal. D. two of the above are correct E. all of the above are correct
D. two of the above are correct
Which of the following constitutes an example of a cost that is not incremental, and therefore, not relevant in the capital budgeting decision? A. A firm has a parcel of land that can be used for a new plant site, or alternatively, can be used to grow watermelons for sale. B. A firm can produce a new cleaning product that will generate new sales, but some of the new sales will be from customers who switched from another product the company currently produces. C. A firm orders and receives a piece of new equipment that is shipped across the country and requires $25,000 in installation and set-up costs. D. Two of the above statements are examples of true incremental cash flows. E. All of the above statements are examples of true incremental cash flows.
E. All of the above statement are examples of true incremental cash flows
Which of the following constitutes an example of a cost that is not incremental, and therefore, not relevant in the capital budgeting decision? A. A firm has a parcel of land that can be used for a new plant site, or alternatively, can be used to grow watermelons for sale. B. A firm can produce a new cleaning product that will generate new sales, but some of the new sales will be from customers who switched from another product the company currently produces. C. A firm orders and receives a piece of new equipement that is shipped across the country and requires $25,000 in installation and set-up costs. D. Two of the above statements are examples of true incremental cash flows. E. All of the above statements are examples of true incremental cash flows.
E. All of the above statements are examples of true incremental cash flows.
Sacramento Paper is considering two mutually exclusive projects. Project A has an internal rate of return (IRR) of 10%, while Project B has an IRR of 13%. The two projects have the same risk, the same cost, and when the cost of capital (discount rate) is 8% the projects have the same NPV. Assume that both projects have an initial cash outflow followed by a series of positive cash inflows. Given this information, which of the following statements is correct? A. If the cost of capital is 7%, Project B's NPV will be higher than Project A's NPV. B. If the cost of capital is 7%, Project A's NPV will be higher than Project B's NPV. C. For a project with normal cash flows, the MIRR will always be closer to the project's cost of capital than it's IRR. D. Answers A and C are correct. E. Answers B and C are correct.
E. Answers B and C are correct
Projects A and B have the same expected lives, the same initial outlays, the same risk, the same expected life, and are mutually exclusive. Project B has a higher IRR than Project A. Which of the following statements always must be true? A. Project B should be accepted and Project A should be rejected. B. Project A should be accepted and Project B should be rejected. C. Project B has a higher NPV than Project A. D. Two of the above statements must always be true. E. None of the above statements must always be true.
E. None of the above statements must always be true.
A proposed project has normal cash flows. In other words, there is an up-front cost followed over time by a series of positive cash flows. The project's internal rate of return is 12% and its cost of capital (discount rate) is 10%. Which of the following statements is correct? A. the project's NPV must be positive B. the project's MIRR must be greater than 10% but less than 12% C. the project's payback period must be greater than its discounted payback period. D. two of the above are correct E. all of the above (a-c) are correct
E. all of the above (a-c) are correct
Which of the following statements is (are) true? A. The IRR discount rate makes NPV equal zero. B. Because the discounted payback period takes account of the cost of capital in the discount rate, it provides a better consideration of the risk of the project's cash flows than the simple payback period. C. If the NPV of a project is negative, then the IRR of the investment must be greater than the discount rate used to computer the net present value. D. two of the above are correct. E. all of the above are correct.
E. all of the above are correct
Which of the following statements is most correct? A. The IRR calculation implicitly assumes that all cash flows are reinvested at a rate of return equal to the cost of capital. B. If Project A has a higher IRR than Project B, then Project A must also have a higher NPV. C. If a project's IRR exceeds the cost of capital (required rate or return for the project), then the project's NPV must be negative. D. more than one of the above. E. none of the above
E. none of the above
Which of the following statements is most correct? A. The MIRR method assumes that cash flows will be reinvested at the cost of capital, while the IRR method assumes cash flows will not be reinvested. B. The MIRR method assumes that cash flows will be reinvested at the risk-free rate, while the IRR method assumes reinvestment at the IRR. C. The MIRR method assumes that cash flows will be reinvested at the cost of capital, while the IRR method assumes reinvestment at the risk-free rate. D. more than one of the above E. none of the above
E. none of the above
Project X has an internal rate of return (IRR) of 20%. Project Y has an IRR of 15%. Both projects have a positive net present value. Which of the following statements is most correct? A. Project X must have a higher NPV than Project Y. B. If the two projects have the same cost of capital, Project X must have the higher NPV. C. Project X must have a short payback period than Project Y. D. More than one of the above are correct. E. None of the above are correct.
E. none of the above are correct
PICTURE: Projects A and B have the same expected lives and initial cash outflows. However, one project's cash flows are larger in the early years, while the other project has larger cash flows in the later years. The two NPV profiles are given below. Which of the statements A-E is the most correct? A. Project A has the smaller cash flows in the later years. B. Project A has the larger cash flows in the later years. C. It is necessary to know the cost of capital in order to know which project has the higher cash in the later years. D. The NPV profiles shown cannot be correct for the photos described E. none of the statements above are correct
PICTURE: B. Project A has the larger cash flows in the later years.
Sacramento Paper is considering two mutually exclusive projects. Project A has an internal rate return (IRR) of 12%, while Project B has an IRR of 14%. The two projects have the same risk, and when the cost of capital (discount rate) is 7% the projects has the same NPV. Assume that both projects have an initial cash outflow followed by a series of positive cash inflows. Given this information, which of the following statements is correct? A. if the cost of capital is 13%, Project B's NPV will be higher than Project A's NPV. B. if the cost of capital is 9%, Project B's NPV will be higher than Project A's NPV. C. if the cost of capital is 9%, Project B's modified internal rate (MIRR) will be less than its IRR. D. two of the above are correct. E. all of the above (a-c) are correct
e. all of the above (a-c) are correct
