FNCE 495 - Chapter 11 - Final Exam

Which of the following best describes the NPV profile?

A graph of a project's NPV as a function of possible capital costs.

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.

If a project's NPV is less than zero, then its IRR must be less than the WACC.

Which of the following statements is most correct?

If a project's internal rate of return (IRR) exceeds the cost of capital, then the project's net present value (NPV) must be positive.

Project A has an IRR of 15 percent. Project B has an IRR of 18 percent. Both projects have the same risk. Which of the following statements is most correct?

If the WACC is 15 percent, the NPV of Project B will exceed the NPV of Project A.

Which of these describe groups or pairs of projects where you can accept one but not all?

Mutually exclusive

Which of the following is a technique for evaluating capital projects that is particularly useful when firms face time constraints in repaying investors?

Payback

Compute the NPV for Project X and accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent. Time 0 1 2 3 4 5 Cash Flow -75 -75 0 100 75 50

$14.22

Compute the NPV for Project X and accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 9 percent. Time 0 1 2 3 4 5 Cash Flow -1,000 -75 100 100 0 2,000

$392.44

Compute the payback statistic for Project X and recommend whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent and the maximum allowable payback is five years. Time 0 1 2 3 4 5 Cash Flow -75 -75 0 100 75 50

3.67 years, accept

Assume a project has normal cash flows (i.e., the initial cash flow is negative, and all other cash flows are positive). Which of the following statements is most correct?

All else equal, a project's NPV increases as the cost of capital declines.

Project A has an internal rate of return (IRR) of 15 percent. Project B has an IRR of 14 percent. Both projects have a cost of capital of 12 percent. Which of the following statements is most correct?

Both projects have a positive net present value (NPV).

Westchester Corp. is considering two equally risky, mutually exclusive projects, both of which projects have normal cash flows. Project A has an IRR of 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?

If the WACC is 9%, Project B's NPV will be higher than Project A's.

Which of these is a capital budgeting technique that generates decision rules and associated metrics for choosing projects based upon the implicit expected geometric average of a project's rate of return?

Internal rate of return

Two mutually exclusive projects each have a cost of $10,000. The total, undiscounted cash flows from Project L are $15,000, while the undiscounted cash flows from Project S total $13,000. Their NPV profiles cross at a discount rate of 10 percent. Which of the following statements best describes this situation?

The NPV and IRR methods will select the same project if the cost of capital is greater than 10 percent; for example, 18 percent.

If a project's present value payback period equals the length of the project, then ________.

The NPV is zero

If the IRR of a project is equal to the discount rate of the project then _______.

The NPV is zero

Which of the following statements is CORRECT?

The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the IRR.

A project has an up-front cost of $100,000. The project's WACC is 12 percent and its net present value is $10,000. Which of the following statements is most correct?

The project's internal rate of return is greater than 12 percent

We accept projects with a positive NPV because it means that:

We have recovered all our costs. We are creating wealth for shareholders. The project's expected return exceeds the cost of capital.

Neither payback period nor discounted payback period techniques for evaluating capital projects account for:

cash flows that occur after payback.

A project has an initial cost of $20,000.00 and no another costs throughout the life of the project. Assuming the project has a PI of 1.23, the IRR is _________.

greater than the discount rate

A decision rule and associated methodology for converting the NPV into a rate-based metric is referred to as:

profitability index