Filters
Question type
Study Flashcards

Which of the following statements is CORRECT?


A) The internal rate of return method (IRR) is generally regarded by academics as being the best single method for evaluating capital budgeting projects.
B) The payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects.
C) The discounted payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects.
D) The net present value method (NPV) is generally regarded by academics as being the best single method for evaluating capital budgeting projects.
E) The modified internal rate of return method (MIRR) is generally regarded by academics as being the best single method for evaluating capital budgeting projects.

F) A) and B)
G) D) and E)

Correct Answer

verifed

verified

Fernando Designs is considering a project that has the following cash flow and WACC data.What is the project's discounted payback? Fernando Designs is considering a project that has the following cash flow and WACC data.What is the project's discounted payback? A) 1.62 years B) 1.58 years C) 1.15 years D) 1.47 years E) 1.24 years


A) 1.62 years
B) 1.58 years
C) 1.15 years
D) 1.47 years
E) 1.24 years

F) D) and E)
G) A) and B)

Correct Answer

verifed

verified

The NPV and IRR methods,when used to evaluate two independent and equally risky projects,will lead to different accept/reject decisions and thus capital budgets if the projects' IRRs are greater than their costs of capital.

A) True
B) False

Correct Answer

verifed

verified

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 project's IRR will increase.
D) If the WACC increases,each project's 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.

F) A) and D)
G) B) and C)

Correct Answer

verifed

verified

Project S has a pattern of high cash flows in its early life,while Project L has a longer life,with large cash flows late in its life.Neither has negative cash flows after Year 0,and at the current cost of capital,the two projects have identical NPVs.Now suppose interest rates and money costs decline.Other things held constant,this change will cause L to become preferred to S.

A) True
B) False

Correct Answer

verifed

verified

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 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.

F) B) and E)
G) A) and D)

Correct Answer

verifed

verified

Under certain conditions,a project may have more than one IRR.One such condition is when,in addition to the initial investment at time = 0,a negative cash flow (or cost)occurs at the end of the project's life.

A) True
B) False

Correct Answer

verifed

verified

Conflicts between two mutually exclusive projects occasionally occur,where the NPV method ranks one project higher but the IRR method puts the other one first.In theory,such conflicts should be resolved in favor of the project with the higher NPV.

A) True
B) False

Correct Answer

verifed

verified

The primary reason that the NPV method is conceptually superior to the IRR method for evaluating mutually exclusive investments is that multiple IRRs may exist,and when that happens,we don't know which IRR is relevant.

A) True
B) False

Correct Answer

verifed

verified

Which of the following statements is CORRECT?


A) For a project to have more than one IRR,then both IRRs must be greater than the WACC.
B) If two projects are mutually exclusive,then they are likely to have multiple IRRs.
C) If a project is independent,then it cannot have multiple IRRs.
D) Multiple IRRs can occur only if the signs of the cash flows change more than once.
E) 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.

F) A) and C)
G) B) and E)

Correct Answer

verifed

verified

Assuming that their NPVs based on the firm's cost of capital are equal,the NPV of a project whose cash flows accrue relatively rapidly will be more sensitive to changes in the discount rate than the NPV of a project whose cash flows come in later in its life.

A) True
B) False

Correct Answer

verifed

verified

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 greater than its regular IRR.
B) A project's MIRR is always less than its regular IRR.
C) If a project's IRR is greater than its WACC,then its MIRR will be greater than the IRR.
D) 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.
E) To find a project's 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.

F) A) and B)
G) A) and C)

Correct Answer

verifed

verified

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 project's NPV profile must intersect the X-axis at the project's WACC.

F) A) and D)
G) B) and D)

Correct Answer

verifed

verified

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. 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. A) $102.07 B) $118.25 C) $124.47 D) $95.84 E) $133.18


A) $102.07
B) $118.25
C) $124.47
D) $95.84
E) $133.18

F) C) and D)
G) B) and D)

Correct Answer

verifed

verified

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. 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. A) $73.38 B) $79.56 C) $0.00 D) $96.55 E) $78.01


A) $73.38
B) $79.56
C) $0.00
D) $96.55
E) $78.01

F) A) and D)
G) B) and E)

Correct Answer

verifed

verified

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? 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? A) $214.44 B) $186.47 C) $218.17 D) $182.74 E) $220.03


A) $214.44
B) $186.47
C) $218.17
D) $182.74
E) $220.03

F) B) and E)
G) C) and D)

Correct Answer

verifed

verified

Four of the following statements are truly disadvantages of the regular payback method,but one is not a disadvantage of this method.Which one is NOT a disadvantage of the payback method?


A) Lacks an objective,market-determined benchmark for making decisions.
B) Ignores cash flows beyond the payback period.
C) Does not directly account for the time value of money.
D) Does not provide any indication regarding a project's liquidity or risk.
E) Does not take account of differences in size among projects.

F) A) and B)
G) C) and D)

Correct Answer

verifed

verified

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 NPV is found by compounding the cash inflows at the IRR to find the terminal value (TV) ,then discounting the TV at the WACC.
B) The lower the WACC used to calculate it,the lower the calculated NPV will be.
C) If a project's NPV is less than zero,then its IRR must be less than the WACC.
D) If a project's NPV is greater than zero,then its IRR must be less than zero.
E) The NPV of a relatively low-risk project should be found using a relatively high WACC.

F) A) and C)
G) A) and E)

Correct Answer

verifed

verified

Taggart Inc.is considering a project that has the following cash flow data.What is the project's payback? Taggart Inc.is considering a project that has the following cash flow data.What is the project's payback? A) 2.25 years B) 2.41 years C) 2.07 years D) 1.87 years E) 2.50 years


A) 2.25 years
B) 2.41 years
C) 2.07 years
D) 1.87 years
E) 2.50 years

F) A) and E)
G) C) and D)

Correct Answer

verifed

verified

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. 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. A) $188.91 B) $145.46 C) $228.58 D) $226.70 E) $230.47


A) $188.91
B) $145.46
C) $228.58
D) $226.70
E) $230.47

F) A) and D)
G) A) and C)

Correct Answer

verifed

verified

Showing 61 - 80 of 107

Related Exams

Exam 1

An Overview of Financial Management

65 Questions

Exam 2

Financial Markets and Institutions

33 Questions

Exam 3

Financial Statements,cash Flow,and Taxes

138 Questions

Exam 4

Analysis of Financial Statements

133 Questions

Exam 5

Time Value of Money

164 Questions

Exam 6

Interest Rates

82 Questions

Exam 7

Bonds and Their Valuation

91 Questions

Exam 8

Risk and Rates of Return

147 Questions

Exam 9

Stocks and Their Valuation

89 Questions

Exam 10

The Cost of Capital

94 Questions

Exam 12

Cash Flow Estimation and Risk Analysis

75 Questions

Exam 13

Capital Structure and Leverage

88 Questions

Exam 14

Distribution to Shareholders: Dividends and Share Repurchases

75 Questions

Exam 15

Working Capital Management

124 Questions

Exam 16

Financial Planning and Forecasting

39 Questions

Exam 17

Multinational Financial Management

50 Questions

Exam 18

Interest Rates and Compounding

8 Questions

Exam 19

Zero Coupon Bonds and Taxation

18 Questions

Exam 20

Taxes, Bankruptcy Act, and Financial Management

4 Questions

Exam 21

Capital Budgeting and Risk Analysis

5 Questions

Exam 22

Financial Analysis and Capital Structure Decision Making

3 Questions

Exam 23

Comparing Two Mutually Exclusive Projects: NPV and Equivalent Annual Annuity Analysis

2 Questions

Exam 24

Financial Leverage and Operating Leverage

23 Questions

Show Answer