CH. 11 Finance

A firm should never undertake an investment if accepting the project would cause an increase in the firm's cost of capital.

FALSE

Other things held constant, an increase in the cost of capital discount rate will result in a decrease of a project's IRR.

FALSE

The internal rate of return (IRR) method of evaluating investment projects equates the present value of cash inflows with the present value of cash outflows by discounting all of the cash flows at the firm's cost of capital.

FALSE

A decrease in the firm's discount rate (R) will increase NPV, which could change the accept/reject decision for a potential project. However, such a change would have no impact on the project's IRR, hence on the accept/reject decision under the IRR method.

False

Given two mutually exclusive projects and a zero cost of capital, the payback method and NPV method of selecting investments will always lead to the same decision on which project to undertake.

False

When considering two mutually exclusive projects, the financial manager should always select that project whose internal rate of return is the highest provided the projects have the same initial cost.

False

If the calculated NPV is negative, then which of the following must be true? The discount rate used is

Greater than the internal rate of return

In general, as the size of the firm's total capital budget increases, the average NPV of new investments accepted will decrease.

TRUE

The modified IRR (MIRR) always leads to the same capital budgeting decisions as the NPV method.

TRUE

The primary function of the capital budget is to forecast the funds required for future investments that must be raised through external funding, that is, by selling stock or bonds.

TRUE

Any capital budgeting investment rule should depend solely on forecasted cash flows and the opportunity cost of capital. The rule itself should not be affected by managers' tastes, the choice of accounting method, or the profitability of other independent projects.

True

Conflicts between two mutually exclusive projects, where the NPV method chooses one project but the IRR method chooses the other, should generally be resolved in favor of the project with the higher NPV.

True

If the IRR of normal Project X is greater than the IRR of mutually exclusive Project Y (also normal), we can conclude that the firm will select X rather than Y if X has a NPV > 0.

True

The NPV method's assumption that cash inflows are reinvested at the cost of capital is more reasonable than the IRR's assumption that cash flows are reinvested at the IRR. This makes the NPV method preferable to the IRR method.

True