Financial Management - Chapter 10

Assume a project has normal cash flows. All else equal, which of the following statements is CORRECT? a. A project's NPV increases as the cost of capital declines. b. A project's MIRR is unaffected by changes in the cost of capital. c. A project's regular payback increases as the cost of capital declines. d. A project's discounted payback increases as the cost of capital declines. e. A project's IRR increases as the cost of capital declines.

a. A project's NPV increases as the cost of capital declines.

Consider two projects, X and Y. Project X's IRR is 19% and Project Y's 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 cost of capital 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 greater than 10%. b. If the cost of capital is 8%, Project X will have the higher NPV. c. If the cost of capital is 18%, Project Y will have the higher NPV. d. Project X is larger in the sense that it has the higher initial cost. e. The crossover rate must be less than 10%.

a. The crossover rate must be greater than 10%.

Watts Co. is considering a project that has the following cash flow and cost of capital (r) data. What is the project's MIRR? Note that a project's MIRR can be less than the cost of capital (and even negative), in which case it will be rejected. r = 10.00% Year 0 1 2 3 4 Cash flows −$850 $300 $320 $340 $360 a. 14.08% b. 15.65% c. 17.21% d. 18.94% e. 20.83%

b. 15.65%

Last month, Standard Systems analyzed the project whose cash flows are shown below. However, before the decision to accept or reject the project took place, the Federal Reserve changed interest rates and therefore the firm's cost of capital (r). The Fed's action did not affect the forecasted cash flows. By how much did the change in the r affect the project's forecasted NPV? Note that a project's expected NPV can be negative, in which case it should be rejected. Old r: 10.00% New r: 11.25% Year 0 1 2 3 Cash flows −$1,000 $410 $410 $410 a. −$18.89 b. −$19.88 c. −$20.93 d. −$22.03 e. −$23.13

d. −$22.03

Which of the following statements is CORRECT? a. Projects with "normal" cash flows can have two or more real IRRs. b. Projects with "normal" cash flows must have two changes in the sign of the cash flows, e.g., from negative to positive to negative. If there are more than two sign changes, then the cash flow stream is "nonnormal." c. The "multiple IRR problem" can arise if a project's cash flows are "normal." d. Projects with "nonnormal" cash flows are almost never encountered in the real world. e. Projects with "normal" cash flows can have only one real IRR.

e. Projects with "normal" cash flows can have only one real IRR.

Current Design Co. is considering two mutually exclusive, equally risky, and not repeatable projects, S and L. Their cash flows are shown below. 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. r: 7.50% Year 0 1 2 3 4 CFS −$1,100 $550 $600 $100 $100 CFL −$2,700 $650 $725 $800 $1,400 a. $138.10 b. $149.21 c. $160.31 d. $171.42 e. $182.52

a. $138.10

. Langton 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. In other words, 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. r = 7.00% Year 0 1 2 3 4 CFS −$1,100 $550 $600 $100 $100 CFL −$2,750 $725 $725 $800 $1,400 a. $185.90 b. $197.01 c. $208.11 d. $219.22 e. $230.32

a. $185.90

Ellmann Systems is considering a project that has the following cash flow and cost of capital (r) data. What is the project's NPV? Note that if a project's expected NPV is negative, it should be rejected. r: 9.00% Year 0 1 2 3 Cash flows −$1,000 $500 $500 $500 a. $265.65 b. $278.93 c. $292.88 d. $307.52 e. $322.90

a. $265.65

Reed Enterprises is considering a project that has the following cash flow and cost of capital (r) data. What is the project's NPV? Note that a project's expected NPV can be negative, in which case it will be rejected. r: 10.00% Year 0 1 2 3 Cash flows −$1,050 $450 $460 $470 a. $92.37 b. $96.99 c. $101.84 d. $106.93 e. $112.28

a. $92.37

Modern Refurbishing Inc. is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's IRR can be less than the cost of capital (and even negative), in which case it will be rejected. Year 0 1 2 3 4 Cash flows −$850 $300 $290 $280 $270 a. 13.13% b. 14.44% c. 15.89% d. 17.48% e. 19.22%

a. 13.13%

Nichols Inc. is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's IRR can be less than the cost of capital or negative, in both cases it will be rejected. Year 0 1 2 3 4 5 Cash flows −$1,250 $325 $325 $325 $325 $325 a. 9.43% b. 9.91% c. 10.40% d. 10.92% e. 11.47%

a. 9.43%

You are considering two mutually exclusive, equally risky, projects. Both have IRRs that exceed the cost of capital. 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 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. The same project will rank higher by both criteria. b. 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. The same project will rank higher by both criteria. c. For a conflict to exist between NPV and IRR, the initial investment cost of one project must exceed the cost of the other. d. 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. e. If the two projects' NPV profiles do not cross, then there will be a sharp conflict as to which one should be selected.

a. 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. The same project will rank higher by both criteria.

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

a. One advantage of the NPV over the IRR is that NPV assumes that cash flows will be reinvested at the cost of capital, whereas IRR assumes that cash flows are reinvested at the IRR. The NPV assumption is generally more appropriate.

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. One drawback of the regular payback for evaluating projects is that this method does not properly account for the time value of money. b. If a project's payback is positive, then the project should be rejected because it must have a negative NPV. c. The regular payback ignores cash flows beyond the payback period, but the discounted payback method overcomes this problem. d. If a company uses the same payback requirement to evaluate all projects, say it requires a payback of 4 years or less, then the company will tend to reject projects with relatively short lives and accept long-lived projects, and this will cause its risk to increase over time. e. The longer a project's payback period, the more desirable the project is normally considered to be by this criterion.

a. One drawback of the regular payback for evaluating projects is that this method does not properly account for the time value of money.

Which of the following statements is CORRECT? a. One drawback of the regular payback is that this method does not take account of cash flows beyond the payback period. b. If a project's payback is positive, then the project should be accepted because it must have a positive NPV. c. The regular payback ignores cash flows beyond the payback period, but the discounted payback method overcomes this problem. d. One drawback of the discounted payback is that this method does not consider the time value of money, while the regular payback overcomes this drawback. e. The shorter a project's payback period, the less desirable the project is normally considered to be by this criterion.

a. One drawback of the regular payback is that this method does not take account of cash flows beyond the payback period.

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? 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.

a. Project L.

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. 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.

a. The higher the cost of capital used to calculate the NPV, the lower the calculated NPV will be.

Corner Jewelers, Inc. recently analyzed the project whose cash flows are shown below. However, before the company decided to accept or reject the project, the Federal Reserve changed interest rates and therefore the firm's cost of capital (r). The Fed's action did not affect the forecasted cash flows. By how much did the change in the r affect the project's forecasted NPV? Note that a project's expected NPV can be negative, in which case it should be rejected. Old r: 8.00% New r: 11.25% Year 0 1 2 3 Cash flows −$1,000 $410 $410 $410 a. −$59.03 b. −$56.08 c. −$53.27 d. −$50.61 e. −$48.08

a. −$59.03

Carolina 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. r: 7.75% Year 0 1 2 3 4 CFS −$1,050 $675 $650 CFL −$1,050 $360 $360 $360 $360 a. $11.45 b. $12.72 c. $14.63 d. $16.82 e. $19.35

b. $12.72

. Dickson Co. is considering a project that has the following cash flow and cost of capital (r) data. What is the project's NPV? Note that a project's expected NPV can be negative, in which case it will be rejected. r: 12.00% Year 0 1 2 3 4 5 Cash flows −$1,100 $400 $390 $380 $370 $360 a. $250.15 b. $277.94 c. $305.73 d. $336.31 e. $369.94

b. $277.94

Hart Corp. is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's IRR can be less than the cost of capital or negative, in both cases it will be rejected. Year 0 1 2 3 Cash flows −$1,000 $425 $425 $425 a. 12.55% b. 13.21% c. 13.87% d. 14.56% e. 15.29%

b. 13.21%

Craig's Car Wash Inc. is considering a project that has the following cash flow and cost of capital (r) data. What is the project's discounted payback? r = 10.00% Year 0 1 2 3 Cash flows −$900 $500 $500 $500 a. 1.88 years b. 2.09 years c. 2.29 years d. 2.52 years e. 2.78 years

b. 2.09 years

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

b. Assuming the two projects have the same scale, Project B probably has a faster payback than Project A.

Which of the following statements is CORRECT? Assume that all projects being considered have normal cash flows and are equally risky. a. If a project's IRR is equal to its cost of capital, then under all reasonable conditions, the project's IRR must be negative. b. If a project's IRR is equal to its cost of capital, then under all reasonable conditions the project's NPV must be zero. c. There is no necessary relationship between a project's IRR, its cost of capital, and its NPV. d. 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. e. If a project's IRR is equal to its cost of capital, then, under all reasonable conditions, the project's NPV must be negative.

b. If a project's IRR is equal to its cost of capital, then under all reasonable conditions the project's NPV must be zero.

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 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. If a project's IRR is greater than its cost of capital, then the MIRR will be less than the IRR.

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. The lower the cost of capital used to calculate a project's NPV, the lower the calculated NPV will be. b. If a project's NPV is less 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 NPV of a relatively low-risk project should be found using a relatively high cost of capital. e. A project's NPV is found by compounding the cash inflows at the IRR to find the terminal value (TV), then discounting the TV at the cost of capital.

b. If a project's NPV is less than zero, then its IRR must be less than the cost of capital.

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

b. If the crossover rate is 8%, Project B will have the higher NPV.

Which of the following statements is CORRECT? a. 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. b. Multiple IRRs can exist, but not multiple MIRRs. This is one reason some people favor the MIRR over the regular IRR. c. 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. d. The percentage difference between the MIRR and the IRR is equal to the project's cost of capital. e. 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. Multiple IRRs can exist, but not multiple MIRRs. This is one reason some people favor the MIRR over the regular IRR.

Which of the following statements is CORRECT? a. The IRR method can never be subject to the multiple IRR problem, while the MIRR method can be. b. One reason some people prefer the MIRR to the regular IRR is that the MIRR is based on a generally more reasonable reinvestment rate assumption. c. The higher the cost of capital, the shorter the discounted payback period. d. The MIRR method assumes that cash flows are reinvested at the crossover rate. e. The MIRR and NPV decision criteria can never conflict.

b. One reason some people prefer the MIRR to the regular IRR is that the MIRR is based on a generally more reasonable reinvestment rate assumption.

The cost of capital for two mutually exclusive projects that are being considered is 12%. Project K has an IRR of 20% while Project R's IRR is 15%. The projects have the same NPV at the 12% current cost of capital. Interest rates are currently high. However, you believe that money costs and thus your cost of capital will soon decline. You also think that the projects will not be funded until the cost of capital has decreased, and their cash flows will not be affected by the change in economic conditions. Under these conditions, which of the following statements is CORRECT? a. You should delay a decision until you have more information on the projects, even if this means that a competitor might come in and capture this market. b. You should recommend Project R, because at the new cost of capital it will have the higher NPV. c. You should recommend Project K, because at the new cost of capital it will have the higher NPV. d. You should recommend Project R because it will have both a higher IRR and a higher NPV under the new conditions. e. You should reject both projects because they will both have negative NPVs under the new conditions.

b. You should recommend Project R, because at the new cost of capital it will have the higher NPV.

You are on the staff of O'Hara Inc. The CFO believes project acceptance should be based on the NPV, but Andrew O'Hara, the president, insists that no project should be accepted unless its IRR exceeds the project's risk-adjusted cost of capital. 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 cost of capital 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%, 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, although its NPV is positive, it has an IRR that is less than the cost of capital. b. 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 cost of capital. You should explain this to the president and tell him that the firm's value will increase if the project is accepted. c. You should recommend that the project be rejected. Although its NPV is positive it has two IRRs, one of which is less than the cost of capital, which indicates that the firm's value will decline if the project is accepted. d. You should recommend that the project be rejected because, although its NPV is positive, its MIRR is less than the cost of capital, and that indicates that the firm's value will decline if it is accepted. e. You should recommend that the project be rejected because its NPV is negative and its IRR is less than the cost of capital.

b. 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 cost of capital. You should explain this to the president and tell him that the firm's value will increase if the project is accepted.

Projects S and L, whose cash flows are shown below, are mutually exclusive, equally risky, and not repeatable. Hooper Inc. is considering which of these two projects to undertake. 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 project with the higher IRR will also have the higher NPV, so no value will be lost if the IRR method is used. r: 10.25% Year 0 1 2 3 4 CFS −$2,050 $750 $760 $770 $780 CFL −$4,300 $1,500 $1,518 $1,536 $1,554 a. $134.79 b. $141.89 c. $149.36 d. $164.29 e. $205.36

c. $149.36

Murray 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 wants to use the IRR criterion, while the CFO favors the NPV method. You were hired to advise Murray on the best procedure. If the wrong decision criterion is used, how much potential value would Murray lose? r: 6.00% Year 0 1 2 3 4 CFS −$1,025 $380 $380 $380 $380 CFL −$2,150 $765 $765 $765 $765 a. $188.68 b. $198.61 c. $209.07 d. $219.52 e. $230.49

c. $209.07

Patterson Co. is considering a project that has the following cash flow and cost of capital (r) data. What is the project's NPV? Note that a project's expected NPV can be negative, in which case it will be rejected. r: 10.00% Year 0 1 2 3 Cash flows −$950 $500 $400 $300 a. $54.62 b. $57.49 c. $60.52 d. $63.54 e. $66.72

c. $60.52

Scott Enterprises is considering a project that has the following cash flow and cost of capital (r) data. What is the project's NPV? Note that if a project's expected NPV is negative, it should be rejected. r: 11.00% Year 0 1 2 3 4 Cash flows −$1,000 $350 $350 $350 $350 a. $77.49 b. $81.56 c. $85.86 d. $90.15 e. $94.66

c. $85.86

Garner 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 −$350 $200 $200 $200 a. 1.42 years b. 1.58 years c. 1.75 years d. 1.93 years e. 2.12 years

c. 1.75 years

. Westwood Painting Co. is considering a project that has the following cash flow and cost of capital (r) data. What is the project's MIRR? Note that a project's MIRR can be less than the cost of capital (and even negative), in which case it will be rejected. r = 12.25% Year 0 1 2 3 4 Cash flows −$850 $300 $320 $340 $360 a. 13.42% b. 14.91% c. 16.56% d. 18.22% e. 20.04%

c. 16.56%

McGlothin 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 −$1,150 $500 $500 $500 a. 1.86 years b. 2.07 years c. 2.30 years d. 2.53 years e. 2.78 years

c. 2.30 years

Poder 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 −$750 $300 $325 $350 a. 1.91 years b. 2.12 years c. 2.36 years d. 2.59 years e. 2.85 years

c. 2.36 years

Worthington 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. 2.03 years b. 2.25 years c. 2.50 years d. 2.75 years e. 3.03 years

c. 2.50 years

Pet World is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's IRR can be less than the cost of capital (and even negative), in which case it will be rejected. Year 0 1 2 3 4 5 Cash flows −$9,500 $2,000 $2,025 $2,050 $2,075 $2,100 a. 2.08% b. 2.31% c. 2.57% d. 2.82% e. 3.10%

c. 2.57%

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 project's regular IRR is found by compounding the cash inflows at the cost of capital to find the present value (PV), then discounting the TV to find the IRR. b. If a project's IRR is smaller than the cost of capital, 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 cost of capital to find the terminal value (TV), then discounting the TV at the cost of capital.

c. A project's IRR is the discount rate that causes the PV of the inflows to equal the project's cost.

Which of the following statements is CORRECT? 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.

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.

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

c. Does not provide any indication regarding a project's liquidity or risk.

Which of the following statements is CORRECT? 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 cost of capital.

c. Multiple IRRs can occur only if the signs of the cash flows change more than once.

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? 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.

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.

Which of the following statements is CORRECT? a. The payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects. b. The discounted payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects. c. The net present value method (NPV) is generally regarded by academics as being the best single method for evaluating capital budgeting projects. d. The modified internal rate of return method (MIRR) is generally regarded by academics as being the best single method for evaluating capital budgeting projects. e. The internal rate of return method (IRR) is generally regarded by academics as being the best single method for evaluating capital budgeting projects.

c. The net present value method (NPV) is generally regarded by academics as being the best single method for evaluating capital budgeting projects.

Which of the following statements is CORRECT? 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.

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.

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 project's regular IRR is found by discounting the cash inflows at the cost of capital 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 cost of capital. e. A project's regular IRR is found by compounding the cash inflows at the cost of capital to find the terminal value (TV), then discounting this TV at the cost of capital.

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.

The cost of capital for two mutually exclusive projects that are being considered is 8%. Project K has an IRR of 20% while Project R's IRR is 15%. The projects have the same NPV at the 8% current cost of capital. However, you believe that money costs and thus your cost of capital will also increase. You also think that the projects will not be funded until the cost of capital has increased, and their cash flows will not be affected by the change in economic conditions. Under these conditions, which of the following statements is CORRECT? a. You should delay a decision until you have more information on the projects, even if this means that a competitor might come in and capture this market. b. You should recommend Project R, because at the new cost of capital it will have the higher NPV. c. You should recommend Project K, because at the new cost of capital it will have the higher NPV. d. You should recommend Project K because it has the higher IRR and will continue to have the higher IRR even at the new cost of capital. e. You should reject both projects because they will both have negative NPVs under the new conditions.

c. You should recommend Project K, because at the new cost of capital it will have the higher NPV.

. Farmer 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 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. r = 10.25% Year 0 1 2 3 4 CFS −$950 $500 $800 $0 $0 CFL −$2,100 $400 $800 $800 $1,000 a. $24.14 b. $26.82 c. $29.80 d. $33.11 e. $36.42

d. $33.11

Silverman 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 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. r: 8.75% Year 0 1 2 3 4 CFS −$1,100 $375 $375 $375 $375 CFL −$2,200 $725 $725 $725 $725 a. $32.12 b. $35.33 c. $38.87 d. $40.15 e. $42.16

d. $40.15

Kiley Electronics is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's IRR can be less than the cost of capital (and even negative), in which case it will be rejected. Year 0 1 2 3 Cash flows −$1,100 $450 $470 $490 a. 9.70% b. 10.78% c. 11.98% d. 13.31% e. 14.64%

d. 13.31%

Spence Company is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's IRR can be less than the cost of capital or negative, in both cases it will be rejected. Year 0 1 2 3 4 Cash flows −$1,050 $400 $400 $400 $400 a. 14.05% b. 15.61% c. 17.34% d. 19.27% e. 21.20%

d. 19.27%

Shannon Co. is considering a project that has the following cash flow and cost of capital (r) data. What is the project's discounted payback? r = 10.00% Year 0 1 2 3 4 Cash flows −$950 $525 $485 $445 $405 a. 1.61 years b. 1.79 years c. 1.99 years d. 2.22 years e. 2.44 years

d. 2.22 years

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

d. If Projects S and L have the same NPV at the current cost of capital, 10%, then Project L, the one with the lower IRR, would have a higher NPV if the cost of capital used to evaluate the projects declined.

. Which of the following statements is CORRECT? a. If a project has "normal" cash flows, then its MIRR must be positive. b. If a project has "normal" cash flows, then it will have exactly two real IRRs. c. The definition of "normal" cash flows is that the cash flow stream has one or more negative cash flows followed by a stream of positive cash flows and then one negative cash flow at the end of the project's life. d. If a project has "normal" cash flows, then it can have only one real IRR, whereas a project with "nonnormal" cash flows might have more than one real IRR. e. If a project has "normal" cash flows, then its IRR must be positive.

d. If a project has "normal" cash flows, then it can have only one real IRR, whereas a project with "nonnormal" cash flows might have more than one real IRR.

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. 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 cost of capital. 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 cost of capital, 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.

d. If a project has normal cash flows and its IRR exceeds its cost of capital, then the project's NPV must be positive.

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? 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).

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.

. Lancaster 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 cost of capital is 8%, the projects have the same NPV. Given this information, which of the following statements is CORRECT? a. If the cost of capital is 9%, Project A's NPV will be higher than Project B's. b. If the cost of capital is 6%, Project B's NPV will be higher than Project A's. c. If the cost of capital is greater than 14%, Project A's IRR will exceed Project B's. d. If the cost of capital is 9%, Project B's NPV will be higher than Project A's. e. If the cost of capital is 13%, Project A's NPV will be higher than Project B's.

d. If the cost of capital is 9%, Project B's NPV will be higher than Project A's.

. Which of the following statements is CORRECT? 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.

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.

Which of the following statements is CORRECT? a. One defect of the IRR method is that it does not take account of the time value of money. b. One defect of the IRR method is that it does not take account of the cost of capital. c. One defect of the IRR method is that it values a dollar received today the same as a dollar that will not be received until sometime in the future. d. One defect of the IRR method is that it assumes that the cash flows to be received from a project can be reinvested at the IRR itself, and that assumption is often not valid. e. One defect of the IRR method is that it does not take account of cash flows over a project's full life.

d. One defect of the IRR method is that it assumes that the cash flows to be received from a project can be reinvested at the IRR itself, and that assumption is often not valid.

Which of the following statements is CORRECT? a. One defect of the IRR method versus the NPV is that the IRR does not take account of the time value of money. b. One defect of the IRR method versus the NPV is that the IRR does not take account of the cost of capital. c. One defect of the IRR method versus the NPV is that the IRR values a dollar received today the same as a dollar that will not be received until sometime in the future. d. One defect of the IRR method versus the NPV is that the IRR does not take proper account of differences in the sizes of projects. e. One defect of the IRR method versus the NPV is that the IRR does not take account of cash flows over a project's full life.

d. One defect of the IRR method versus the NPV is that the IRR does not take proper account of differences in the sizes of projects.

Which of the following statements is CORRECT? 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 cost of capital, 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.

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.

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 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.

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.

. Robbins Inc. is considering a project that has the following cash flow and cost of capital (r) data. What is the project's NPV? Note that if a project's expected NPV is negative, it should be rejected. r: 10.25% Year 0 1 2 3 4 5 Cash flows −$1,000 $300 $300 $300 $300 $300 a. $105.89 b. $111.47 c. $117.33 d. $123.51 e. $130.01

e. $130.01

Yoga Center Inc. is considering a project that has the following cash flow and cost of capital (r) data. What is the project's NPV? Note that a project's expected NPV can be negative, in which case it will be rejected. r: 14.00% Year 0 1 2 3 4 Cash flows −$1,200 $400 $425 $450 $475 a. $41.25 b. $45.84 c. $50.93 d. $56.59 e. $62.88

e. $62.88

. Markman & Sons is considering Projects S and L. These projects are mutually exclusive, equally risky, and not repeatable and their cash flows are shown below. 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 project with the higher IRR will also have the higher NPV, i.e., no conflict will exist. r: 10.00% Year 0 1 2 3 4 CFS −$1,025 $650 $450 $250 $50 CFL −$1,025 $100 $300 $500 $700 a. $5.47 b. $6.02 c. $6.62 d. $7.29 e. $7.82

e. $7.82

Wiley's Wire Products is considering a project that has the following cash flow and cost of capital (r) data. What is the project's MIRR? Note that a project's MIRR can be less than the cost of capital (and even negative), in which case it will be rejected. r = 11.00% Year 0 1 2 3 Cash flows −$800 $350 $350 $350 a. 8.86% b. 9.84% c. 10.94% d. 12.15% e. 13.50%

e. 13.50%

Computer Consultants Inc. is considering a project that has the following cash flow and cost of capital (r) data. What is the project's MIRR? Note that a project's MIRR can be less than the cost of capital (and even negative), in which case it will be rejected. r = 10.00% Year 0 1 2 3 Cash flows −$1,000 $450 $450 $450 a. 9.32% b. 10.35% c. 11.50% d. 12.78% e. 14.20%

e. 14.20%

Suzanne's Cleaners 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 −$1,100 $300 $310 $320 $330 $340 a. 2.31 years b. 2.56 years c. 2.85 years d. 3.16 years e. 3.52 years

e. 3.52 years

Which of the following statements is CORRECT? a. If Project A's IRR exceeds Project B's, then A must have the higher NPV. b. A project's MIRR can never exceed its IRR. c. If a project with normal cash flows has an IRR less than the cost of capital, the project must have a positive NPV. d. If the NPV is negative, the IRR must also be negative. e. If a project with normal cash flows has an IRR greater than the cost of capital, the project must also have a positive NPV.

e. If a project with normal cash flows has an IRR greater than the cost of capital, the project must also have a positive NPV.

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

e. If the cost of capital is 10%, both projects will have positive NPVs.

Projects A and B have identical expected lives and identical initial cash outflows (costs). However, most of one project's cash flows come in the early years, while most of the other project's cash flows occur in the later years. The two NPV profiles are given below: Which of the following statements is CORRECT? a. More of Project B's cash flows occur in the later years. b. We must have information on the cost of capital in order to determine which project has the larger early cash flows. c. The NPV profile graph is inconsistent with the statement made in the problem. d. The crossover rate, i.e., the rate at which Projects A and B have the same NPV, is greater than either project's IRR. e. More of Project A's cash flows occur in the later years.

e. More of Project A's cash flows occur in the later years.

Projects C and D both have normal cash flows and are mutually exclusive. Project C has a higher NPV if the cost of capital is less than 12%, whereas Project D has a higher NPV if the cost of capital exceeds 12%. Which of the following statements is CORRECT? a. Project D is probably larger in scale than Project C. b. Project C probably has a faster payback. c. Project C probably has a higher IRR. d. The crossover rate between the two projects is below 12%. e. Project D probably has a higher IRR.

e. Project D probably has a higher IRR.

Which of the following statements is CORRECT? a. The discounted payback method eliminates all of the problems associated with the payback method. b. When evaluating independent projects, the NPV and IRR methods often yield conflicting results regarding a project's acceptability. c. To find the MIRR, we discount the TV at the IRR. d. A project's NPV profile must intersect the X-axis at the project's cost of capital. e. 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.

e. 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.

Which of the following statements is CORRECT? 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.

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.