Question 1

increase in the firm's WACC will decrease projects' NPVs, which could change the accept/reject decision for any potential project.However, such a change would have no impact on projects' IRRs.Therefore, the accept/reject decision under the IRR method is independent of the cost of capital.

Accepted Answer

The IRR method is not independent of the cost of capital because the decision to accept or reject a project using IRR depends on comparing the IRR to the firm's WACC. An increase in WACC can affect the accept/reject decision if the IRR is close to the WACC.

Question 2

IRR of normal Project X is greater than the IRR of normal Project Y, and both IRRs are greater than zero.Also, the NPV of X is greater than the NPV of Y at the cost of capital.If the two projects are mutually exclusive, Project X should definitely be selected, and the investment made, provided we have confidence in the data.Put another way, it is impossible to draw NPV profiles that would suggest not accepting Project X.

Accepted Answer

The answer of IRR of normal Project X is greater...

Question 3

Which of the following statements is CORRECT?

Accepted Answer

The IRR method 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. This can lead to incorrect investment decisions. The other statements are not correct about the IRR method.

Question 4

you were evaluating two mutually exclusive projects for a firm with a zero cost of capital, the payback method and NPV method would always lead to the same decision on which project to undertake.

Accepted Answer

The payback method and NPV method can lead to different decisions because the payback method ignores the time value of money and cash flows beyond the payback period, while NPV considers all cash flows and discounts them to present value.

Question 5

Which of the following statements is CORRECT?

Accepted Answer

The answer of Which of the following statements is CORRECT?
...

Question 6

Which of the following statements is CORRECT?

Accepted Answer

The regular payback method only considers the time it takes to recoup the initial investment, and does not account for cash flows beyond that point. This means that profitable projects with long-term benefits may be rejected based on this method, making it less reliable as a sole criterion for project evaluation.

Question 7

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.

Accepted Answer

The IRR is the discount rate that makes the present value of the cash inflows equal to the initial cost of the project, so option D is correct. Option A is incorrect because it describes the calculation of terminal value, not regular IRR. Option B is incorrect because it describes the calculation of regular NPV, not regular IRR. Option C is incorrect because if a project's IRR is smaller than the WACC, its NPV will be negative, not positive. Option E is also incorrect because a project can have a positive IRR and negative NPV if the IRR is less than the WACC.

Question 8

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 cost of capital.

Accepted Answer

The answer of NPV and IRR methods, when used to...

Question 9

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.

Accepted Answer

A decline in interest rates and money costs will increase the present value of future cash flows, and since Project L has larger cash flows later in its life, its NPV will increase relatively more than Project S. Therefore, L will become preferred to S.

Question 10

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

Accepted Answer

The answer of the IRR of normal Project X is...

Question 11

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.

Accepted Answer

The statement in option C is correct according to the concept of NPV and IRR. A project with a negative NPV means that the discounted cash outflows exceed the discounted cash inflows. This implies that the cost of capital or the WACC used to discount the cash flows is higher than the IRR of the project. Therefore, option C is the correct statement. Option A is incorrect because the correct method is to discount the cash flows at the WACC and not to compound the cash inflows at the IRR. Option B is incorrect because a lower WACC will increase the NPV, all else being equal. Option D is incorrect because if the NPV is positive, the project's IRR must be higher than the WACC. Option E is incorrect because higher risks should be associated with higher WACC, not lower WACC.

Question 12

Normal Projects S and L have the same NPV when the discount rate is zero.However, Project S's cash flows come in faster than those of L.Therefore, we know that at any discount rate greater than zero, L will have the higher NPV.

Accepted Answer

We cannot conclude that L will have the higher NPV at any discount rate greater than zero simply because S's cash flows come in faster. The discount rate affects the present value of future cash flows, and depending on the timing and magnitude of the cash flows for each project, it is possible that S could still have a higher NPV at some discount rates while L could have a higher NPV at others.

Question 13

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

Accepted Answer

Capital budgeting decisions and investment analysis should rely on objective criteria such as forecasted cash flows and the opportunity cost of capital. Managers' personal preferences, accounting methods, or external factors should not influence the investment decision.

Question 14

NPV and IRR methods, when used to evaluate two equally risky but mutually exclusive projects, will lead to different accept/reject decisions and thus capital budgets if the cost of capital at which the projects' NPV profiles cross is less than the projects' cost of capital.

Accepted Answer

The answer of NPV and IRR methods, when used to...

Question 15

regular payback method is deficient in that it does not take account of cash flows beyond the payback period.The discounted payback method corrects this fault.

Accepted Answer

The answer of regular payback method is deficient in that...

Question 16

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.

Accepted Answer

The regular payback method does not account for the time value of money, which means that it does not consider the fact that a dollar received in the future is worth less than a dollar received today. This can lead to incorrect decisions when comparing projects with different cash flow patterns over time.

Question 17

Which of the following statements is CORRECT?

Accepted Answer

The answer of Which of the following statements is CORRECT?
...

Question 18

conflict will exist between the NPV and IRR methods, when used to evaluate two equally risky but mutually exclusive projects, if the projects' cost of capital exceeds the rate at which the projects' NPV profiles cross.

Accepted Answer

This is known as the conflict or multiple IRR problem, where the IRR method may suggest taking one project while the NPV method suggests taking the other. This occurs when the NPV profiles of two projects intersect at least twice and the cost of capital exceeds the rate at which the profiles cross.

Question 19

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.

Accepted Answer

The correct statement is that 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. This means that the net present value (NPV) of the project is equal to zero. The IRR is the discount rate that makes the NPV zero. Therefore, statement D is the correct statement.

Question 20

Which of the following statements is CORRECT?

Accepted Answer

The regular payback method calculates the amount of time it will take to recover the initial investment in a project, but it does not take into account cash flows beyond that point. Therefore, it is useful for indicating a project's liquidity. Option A is incorrect as the regular payback method only considers cash flows up to the payback point. Option B is incorrect as this is a description of the discounted payback method. Option C is incorrect as the regular payback method is still used by some companies. Option E is partially correct but the statement that discounted payback overcomes the regular payback's defect is not completely accurate as both methods serve different purposes.

Quiz 10: Capital Budgeting

increase in the firm's WACC will decrease projects' NPVs, which could change the accept/reject decision for any potential project.However, such a change would have no impact on projects' IRRs.Therefore, the accept/reject decision under the IRR method is independent of the cost of capital.

Which of the following statements is CORRECT?

you were evaluating two mutually exclusive projects for a firm with a zero cost of capital, the payback method and NPV method would always lead to the same decision on which project to undertake.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

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.

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 cost of capital.

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

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.

Normal Projects S and L have the same NPV when the discount rate is zero.However, Project S's cash flows come in faster than those of L.Therefore, we know that at any discount rate greater than zero, L will have the higher NPV.

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

NPV and IRR methods, when used to evaluate two equally risky but mutually exclusive projects, will lead to different accept/reject decisions and thus capital budgets if the cost of capital at which the projects' NPV profiles cross is less than the projects' cost of capital.

regular payback method is deficient in that it does not take account of cash flows beyond the payback period.The discounted payback method corrects this fault.

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.

Which of the following statements is CORRECT?

conflict will exist between the NPV and IRR methods, when used to evaluate two equally risky but mutually exclusive projects, if the projects' cost of capital exceeds the rate at which the projects' NPV profiles cross.

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.

Which of the following statements is CORRECT?