Question 1

A financial asset will pay you $50,000 at the end of 20 years if you pay premiums of $975 per year at the end of each year for 20 years. What is the IRR of this financial asset?
A)8.64 percent
B)9.02 percent
C)10.51 percent
D)11.29 percent

Accepted Answer

The answer of A financial asset will pay you $50,000...

Question 2

A project costs $101,000 today and is expected to generate cash flows of $31,000 per year for the next 15 years. At what rate is the NPV equal to zero?
A)30.10 percent
B)29.83 percent
C)22.47 percent
D)31.38 percent

Accepted Answer

The answer of A project costs $101,000 today and is...

Question 3

A project costs $91,000 today and is expected to generate cash flows of $11,000 per year for the next 20 years. The firm has a cost of capital of 8 percent. Should this project be accepted, and why?
A)Yes, the project should be accepted since it has a NPV = $15,391.23.
B)Yes, the project should be accepted since it has a NPV = $13,610.89.
C)Yes, the project should be accepted since it has a NPV = $16,999.62.
D)None of the options are correct.

Accepted Answer

The answer of A project costs $91,000 today and is...

Question 4

The MIRR statistic is different from the IRR statistic in that:
A)the MIRR assumes that the cash inflows can be reinvested at the cost of capital.
B)the MIRR assumes that the cash inflows can be reinvested at the IRR.
C)the MIRR uses weighted-average dollars.
D)the MIRR uses input from the NPV whereas the IRR does not.

Accepted Answer

The MIRR assumes that the cash inflows can be reinvested at the cost of capital, while the IRR assumes that cash inflows are reinvested at the same rate as the project's internal rate of return. Therefore, the MIRR is a more realistic measure of profitability as it takes into account the actual cost of capital, while the IRR may overestimate the project's true profitability. The other choices are incorrect as they do not properly describe the difference between MIRR and IRR.

Question 5

A financial asset will pay you $10,000 at the end of 10 years if you pay premiums of $175 per year at the end of each year for 10 years. What is the IRR of this financial asset?
A)33.26 percent
B)34.98 percent
C)35.93 percent
D)36.72 percent

Accepted Answer

Using a financial calculator, inputting the following data:
N = 10
PMT = -175
FV = 10,000
Solve for I/YR = 35.93%
Therefore, the IRR of this financial asset is approximately 35.93%.

Question 6

We accept projects with a positive NPV because it means that:
A)we have recovered all our costs.
B)we are creating wealth for shareholders.
C)the project's expected return exceeds the cost of capital.
D)all of the options.

Accepted Answer

The answer of We accept projects with a positive NPV...

Question 7

How many possible IRRs could you find for the following set of cash flows? $$\begin{array} { l c c c c c } 
\text { Time } & 0 & 1 & 2 & 3 & 4 \
\text { Cash Flow } & - \$ 15,000 & \$ 6,000 & \$ 10,000 & \$ 12,000 & - \$ 1,000 \
\hline
\end{array}$$
A)1
B)2
C)3
D)Unable to determine unless we have the cost of capital.

Accepted Answer

IRR is unique for a given set of cash flows.

Question 8

A disadvantage of the payback statistic is that:
A)it does not reflect the time value of money.
B)it does not give an indication of the project's riskiness.
C)it does not consider cash flows beyond the payback period.
D)All of the options are disadvantages of payback.

Accepted Answer

All of the options listed are disadvantages of payback. The payback statistic does not take into account the time value of money, the riskiness of the project or cash flows beyond the payback period.

Question 9

Projects A and B are mutually exclusive. Project A costs $10,000 and is expected to generate cash inflows of $4,000 for four years. Project B costs $10,000 and is expected to generate a single cash flow in year 4 of $20,000. The cost of capital is 12 percent. Which project would you accept and why?
A)Project B because it has the higher NPV.
B)Project B because it has the higher IRR.
C)Project A because it has the higher NPV.
D)Project A because it has the higher IRR.

Accepted Answer

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

Question 10

A company is considering two mutually exclusive projects, A and B Project A requires an initial investment of $200, followed by cash flows of $185, $40, and $15. Project B requires an initial investment of $200, followed by cash flows of $0, $50, and $230. What is the IRR of the project that is best for the company's shareholders? The firm's cost of capital is 10 percent.
A)15.45 percent
B)15.12 percent
C)13.57 percent
D)12.71 percent

Accepted Answer

The answer of A company is considering two mutually exclusive...

Question 11

A company is considering two mutually exclusive projects, A and B Project A requires an initial investment of $100, followed by cash flows of $95, $20, and $5. Project B requires an initial investment of $100, followed by cash flows of $0, $20, and $130. What is the IRR of the project that is best for the company's shareholders? The firm's cost of capital is 10 percent.
A)15.24 percent
B)15.96 percent
C)16.17 percent
D)15.42 percent

Accepted Answer

IRR of Project A = 15.24%IRR of Project B = 15.96%Project B has a higher IRR than Project A, so it is the better project for the company's shareholders.

Question 12

The least-used capital budgeting technique in industry is:
A)NPV.
B)IRR.
C)P\payback.
D)MIRR.

Accepted Answer

MIRR (Modified Internal Rate of Return) is the least commonly used capital budgeting technique in industry. This may be because MIRR is a more complex and time-consuming calculation than other techniques, and its results may not always be easy to interpret. However, MIRR can be more accurate than other methods in certain situations, such as where cash flows are reinvested at a different rate than the project's initial cost of capital. Therefore, while MIRR may not be the most popular technique, it can still be useful in certain circumstances.

Question 13

Projects A and B are mutually exclusive. Project A costs $20,000 and is expected to generate cash inflows of $7,500 for 4 years. Project B costs $10,000 and is expected to generate a single cash flow in year 4 of $20,000. The cost of capital is 12%. Which project would you accept and why?
A)Project B because it has the higher NPV.
B)Project B because it has the higher IRR.
C)Project A because it has the higher NPV.
D)Project A because it has the higher IRR.

Accepted Answer

To determine which project to accept, we need to calculate the NPV (Net Present Value) of each project using the formula:

NPV = -Initial Investment + Sum of (Cash Flows / (1+Cost of Capital)^t)

For Project A:
NPV = -$20,000 + [$7,500/(1+0.12)^1] + [$7,500/(1+0.12)^2] + [$7,500/(1+0.12)^3] + [$7,500/(1+0.12)^4]
NPV = -$20,000 + $5,303.57 + $4,703.16 + $4,192.20 + $3,745.26 = $-2,055.81

For Project B:
NPV = -$10,000 + [$20,000/(1+0.12)^4]
NPV = -$10,000 + $11,680.06 = $1,680.06

Since Project A has a negative NPV, it is not a good investment. Therefore, the best choice is Project B because it has a positive NPV of $1,680.06.

Quiz 13: Weighing Net Present Value and Other Capital Budgeting Criteria

A financial asset will pay you $50,000 at the end of 20 years if you pay premiums of $975 per year at the end of each year for 20 years. What is the IRR of this financial asset?

A project costs $101,000 today and is expected to generate cash flows of $31,000 per year for the next 15 years. At what rate is the NPV equal to zero?

A project costs $91,000 today and is expected to generate cash flows of $11,000 per year for the next 20 years. The firm has a cost of capital of 8 percent. Should this project be accepted, and why?

The MIRR statistic is different from the IRR statistic in that:

A financial asset will pay you $10,000 at the end of 10 years if you pay premiums of $175 per year at the end of each year for 10 years. What is the IRR of this financial asset?

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

How many possible IRRs could you find for the following set of cash flows? $\begin{array} { l c c c c c } \text { Time } & 0 & 1 & 2 & 3 & 4 \\\text { Cash Flow } & - \$ 15,000 & \$ 6,000 & \$ 10,000 & \$ 12,000 & - \$ 1,000 \\\hline\end{array}$

A disadvantage of the payback statistic is that:

Projects A and B are mutually exclusive. Project A costs $10,000 and is expected to generate cash inflows of $4,000 for four years. Project B costs $10,000 and is expected to generate a single cash flow in year 4 of $20,000. The cost of capital is 12 percent. Which project would you accept and why?

The least-used capital budgeting technique in industry is:

Projects A and B are mutually exclusive. Project A costs $20,000 and is expected to generate cash inflows of $7,500 for 4 years. Project B costs $10,000 and is expected to generate a single cash flow in year 4 of $20,000. The cost of capital is 12%. Which project would you accept and why?