Question 1

Resnick Inc. is considering a project that has the following cash flow data. What is the project's payback? 
A) 1.42 years
B) 1.58 years
C) 1.75 years
D) 1.93 years

Accepted Answer

The answer of Resnick Inc. is considering a project that...

Question 2

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.

Accepted Answer

The Modified Internal Rate of Return (MIRR) considers the cost of capital (WACC) to reinvest the cash inflows, unlike the regular IRR which assumes reinvestment at the IRR itself. This makes the MIRR a more realistic measure of a project's profitability, especially in scenarios where reinvesting at the project's own IRR is not feasible.

Question 3

Anderson Systems is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that if a project's expected NPV is negative, it should be rejected. 
A) $265.65
B) $278.93
C) $292.88
D) $307.52
E) $322.90

Accepted Answer

The answer of Anderson Systems is considering a project that...

Question 4

Mansi Inc. is considering a project that has the following cash flow data. What is the project's payback? 
A) 1.91 years
B) 2.12 years
C) 2.36 years
D) 2.59 years

Accepted Answer

The answer of Mansi Inc. is considering a project that...

Question 5

Simms 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 WACC or negative, in both cases it will be rejected. 
A) 12.55%
B) 13.21%
C) 13.87%
D) 14.56%
E) 15.29%

Accepted Answer

The answer of Simms Corp. is considering a project that...

Question 6

Thorley 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 WACC or negative, in both cases it will be rejected. 
A) 9.43%
B) 9.91%
C) 10.40%
D) 10.92%
E) 11.47%

Accepted Answer

The answer of Thorley Inc. is considering a project that...

Question 7

Taggart Inc. is considering a project that has the following cash flow data. What is the project's payback? 
A) 1.86 years
B) 2.07 years
C) 2.30 years
D) 2.53 years
E) 2.78 years

Accepted Answer

To calculate payback, we need to keep adding up the cash inflows until we reach the initial investment.

Year 1: 200,000
Year 2: 300,000
Year 3: 400,000
Year 4: 500,000
Year 5: 600,000

Cumulative cash inflows:
Year 1: 200,000
Year 2: 500,000 (200,000 + 300,000)
Year 3: 900,000 (500,000 + 400,000)
Year 4: 1,400,000 (900,000 + 500,000)
Year 5: 2,000,000 (1,400,000 + 600,000)

Therefore, the payback period is between Year 4 and Year 5, and we can calculate the exact payback period as follows:
Initial investment = 1,500,000
Amount remaining to recover = 500,000 (2,000,000 - 1,500,000)
Payback period = 4 + (500,000/600,000)
Payback period = 4.83 years

Since answer option C is the closest to our calculation, it is the best choice.

Question 8

Harry's Inc. is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that if a project's expected NPV is negative, it should be rejected. 
A) $105.89
B) $111.47
C) $117.33
D) $123.51
E) $130.01

Accepted Answer

The answer of Harry's Inc. is considering a project that...

Question 9

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 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 the MIRR will be less than the IRR.
D) If a project's IRR is greater than its WACC, then the MIRR will be greater than the IRR.
E) 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 WACC.

Accepted Answer

C) If a project's IRR (Internal Rate of Return) is greater than its WACC (Weighted Average Cost of Capital), then the MIRR (Modified Internal Rate of Return) will generally be less than the IRR. This is because MIRR assumes reinvestment at the project's cost of capital (WACC), which is typically lower than the IRR when the IRR exceeds the WACC, leading to a lower MIRR compared to IRR.

Question 10

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.

Accepted Answer

The IRR is the discount rate that makes the NPV of a project zero. If two projects have the same NPV at a certain WACC, and if the WACC decreases, the project with the lower IRR (Project L) will see a greater increase in its NPV. This is because the NPV is more sensitive to changes in the discount rate when the rate is closer to the project's IRR.

Question 11

You are considering two mutually exclusive, equally risky, projects. Both have IRRs that exceed the WACC. 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 two projects' NPV profiles do not cross, then there will be a sharp conflict as to which one should be selected.
B) 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.
C) 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.
D) For a conflict to exist between NPV and IRR, the initial investment cost of one project must exceed the cost of the other.

Accepted Answer

If the cost of capital is greater than the crossover rate, the NPV and IRR criteria will agree on which project to select, as both will rank the same project higher.

Question 12

McCall Manufacturing has a WACC of 10%. The firm is considering two normal, equally risky, mutually exclusive, but not repeatable projects. 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) Each project must have a negative NPV.
B) Since the projects are mutually exclusive, the firm should always select Project B.
C) If the crossover rate is 8%, Project B will have the higher NPV.
D) Only one project has a positive NPV.

Accepted Answer

The crossover rate is the point where the NPV profiles of two projects intersect. At this point, the NPVs of both projects are equal. Given that the NPV profiles cross in the upper right quadrant, Project B must have a higher NPV than Project A for discount rates greater than the crossover rate. Therefore, if the crossover rate is 8%, Project B will have the higher NPV. Option A is not correct as mutually exclusive projects cannot have negative NPVs. Option B is not necessarily true as the decision to choose between mutually exclusive projects depends on factors such as the company's goals, resources, and risk tolerance. Option D is not necessarily true as both projects can have positive NPVs.

Question 13

Susmel Inc. is considering a project that has the following cash flow data. What is the project's payback? 
A) 2.03 years
B) 2.25 years
C) 2.50 years
D) 2.75 years
E) 3.03 years

Accepted Answer

The answer of Susmel Inc. is considering a project that...

Question 14

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

Accepted Answer

The answer of Projects A and B are mutually exclusive...

Question 15

You are on the staff of Camden Inc. The CFO believes project acceptance should be based on the NPV, but Steve Camden, the president, insists that no project should be accepted unless its IRR exceeds the project's risk-adjusted WACC. 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 WACC 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 its NPV is negative and its IRR is less than the WACC.
B) You should recommend that the project be rejected because, although its NPV is positive, it has an IRR that is less than the WACC.
C) 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 WACC. You should explain this to the president and tell him that the firm's value will increase if the project is accepted.
D) You should recommend that the project be rejected. Although its NPV is positive it has two IRRs, one of which is less than the WACC, which indicates that the firm's value will decline if the project is accepted.

Accepted Answer

The project has a positive NPV and the MIRR exceeds the WACC, indicating that the project will increase the firm's value. The fact that the project has two IRRs is not as relevant in this case because the MIRR takes into account the cost of capital and the reinvestment rate, which better reflects the project's potential profitability. It is important to explain this to the president and emphasize the positive impact on the company's value.

Question 16

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 WACC, then, under all reasonable conditions, the project's NPV must be negative.
B) If a project's IRR is equal to its WACC, then under all reasonable conditions, the project's IRR must be negative.
C) If a project's IRR is equal to its WACC, then under all reasonable conditions the project's NPV must be zero.
D) There is no necessary relationship between a project's IRR, its WACC, and its NPV.
E) 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.

Accepted Answer

When a project's Internal Rate of Return (IRR) equals its Weighted Average Cost of Capital (WACC), the Net Present Value (NPV) of the project is zero. This is because the NPV calculation discounts future cash flows at the WACC, and when the discount rate (WACC) equals the project's return rate (IRR), the present value of inflows equals the initial investment, resulting in an NPV of zero.

Question 17

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.

Accepted Answer

DThe crossover rate is the discount rate at which the NPVs of two projects are equal. Since Project Y has a higher NPV at a WACC of 10%, and its IRR is lower than Project X's, the crossover rate must be greater than 10%. This is because as the discount rate increases from the crossover point, the project with the lower IRR (Project Y) will have a higher NPV. Additionally, if the WACC is 18%, which is higher than both projects' IRRs, the project with the lower IRR (Project Y) will decline in NPV at a slower rate than the project with the higher IRR (Project X), making Project Y have a higher NPV at a WACC of 18%.

Question 18

A 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 cannot cross, and the smaller project's NPV will be higher at all positive values of WACC.
B) 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 WACC.
C) 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 WACC is.
D) 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 WACC is less than the crossover rate.

Accepted Answer

The correct statement is that 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 WACC is less than the crossover rate. This means that if the cost of capital is low enough, the larger project will be more valuable despite having a lower IRR. Therefore, the company should consider both the IRR and NPV when choosing between the two projects. Option A is incorrect because even if the smaller project has a higher IRR, the two projects' NPV profiles can cross, and the larger project can have a higher NPV at higher discount rates. Option B is incorrect because the two projects' NPV profiles will cross, and the larger project will have a higher NPV only if the WACC is less than the crossover rate. Option C is incorrect because the company should choose projects based on their NPV, which considers the size, duration, and timing of cash flows, and not just based on their IRR or size.

Question 19

Tuttle Enterprises is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that if a project's expected NPV is negative, it should be rejected. 
A) $77.49
B) $81.56
C) $85.86
D) $90.15
E) $94.66

Accepted Answer

The answer of Tuttle Enterprises is considering a project that...

Question 20

Warr 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 WACC or negative, in both cases it will be rejected. 
A) 14.05%
B) 15.61%
C) 17.34%
D) 19.27%
E) 21.20%

Accepted Answer

The answer of Warr Company is considering a project that...

Quiz 10: The Basics of Capital Budgeting: Evaluating Cash Flows

Resnick Inc. is considering a project that has the following cash flow data. What is the project's payback?

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.

Anderson Systems is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that if a project's expected NPV is negative, it should be rejected.

Mansi Inc. is considering a project that has the following cash flow data. What is the project's payback?

Simms 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 WACC or negative, in both cases it will be rejected.

Thorley 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 WACC or negative, in both cases it will be rejected.

Taggart Inc. is considering a project that has the following cash flow data. What is the project's payback?

Harry's Inc. is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that if a project's expected NPV is negative, it should be rejected.

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.

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?

You are considering two mutually exclusive, equally risky, projects. Both have IRRs that exceed the WACC. Which of the following statements is CORRECT? Assume that the projects have normal cash flows, with one outflow followed by a series of inflows.

Susmel Inc. is considering a project that has the following cash flow data. What is the project's payback?

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 WACC is 12%, and at that rate Project A has the higher NPV. Which of the following statements is CORRECT?

Which of the following statements is CORRECT? Assume that all projects being considered have normal cash flows and are equally risky.

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?

Tuttle Enterprises is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that if a project's expected NPV is negative, it should be rejected.

Warr 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 WACC or negative, in both cases it will be rejected.