Question 1

Projects A and B have identical expected lives and identical initial cash outflows (costs)Which of the following statements is CORRECT?

Accepted Answer

The answer of Projects A and B have identical expected...

Question 2

Which of the following statements is CORRECT?

Accepted Answer

The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the IRR. This is because the NPV method discounts cash flows by the WACC, which represents the cost of capital for the company, while the IRR method calculates the internal rate of return, which is the rate of return that would make the present value of cash inflows equal to the present value of cash outflows, assuming reinvestment at the IRR.

Question 3

Suppose a firm relies exclusively on the payback method when making capital budgeting decisions, and it sets a 4-year payback regardless of economic conditions.Other things held constant, which of the following statements is most likely to be true?

Accepted Answer

The answer of Suppose a firm relies exclusively on the...

Question 4

Assume that the economy is in a mild recession, and as a result interest rates and money costs generally are relatively low.The WACC for two mutually exclusive projects that are being considered is 8%.Project S has an IRR of 20% while Project L's IRR is 15%.The projects have the same NPV at the 8% current WACC.However, you believe that the economy is about to recover, and money costs and thus your WACC will also increase.You also think that the projects will not be funded until the WACC has increased, and their cash flows will not be affected by the change in economic conditions.Under these conditions, which of the following statements is CORRECT?

Accepted Answer

The answer of Assume that the economy is in a...

Question 5

Assume a project has normal cash flows.All else equal, which of the following statements is CORRECT?

Accepted Answer

As the WACC declines, the discount rate used to calculate present values of future cash flows also declines. This results in higher present values, which in turn leads to an increase in the project's NPV. The IRR (A) and regular payback (D) are affected by changes in cash flows, but not by changes in WACC. The MIRR (C) may be affected by changes in WACC if it changes the timing and/or magnitude of cash flows. Discounted payback (E) will increase as the WACC declines because the cash flows are being discounted at a lower rate, making it take longer for the accumulated discounted cash flows to equal the initial investment.

Question 6

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?

Accepted Answer

The regular payback method does provide some indication of a project's liquidity, as it shows how quickly the initial investment can be recovered. However, it does not account for risk, which is a separate issue.

Question 7

Which of the following statements is CORRECT?

Accepted Answer

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

Question 8

Which of the following statements is CORRECT?

Accepted Answer

The net present value method (NPV) is generally regarded as the best single method for evaluating capital budgeting projects as it considers all cash inflows and outflows, discounts them to their present value using the required rate of return, and provides a single value for the project's profitability. IRR and MIRR are also commonly used methods, but they have some limitations, and the payback and discounted payback methods do not consider the time value of money and can lead to incorrect investment decisions.

Question 9

Which of the following statements is CORRECT?

Accepted Answer

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

Question 10

Projects S and L both have an initial cost of $10,000, followed by a series of positive cash inflows.Project S's undiscounted net cash flows total $20,000, while L's total undiscounted flows are $30,000.At a WACC of 10%, the two projects have identical NPVs.Which project's NPV is more sensitive to changes in the WACC?

Accepted Answer

The answer of Projects S and L both have an...

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 higher the WACC used to calculate the NPV, the higher the discount rate applied to the project's cash flows, which decreases their present value and therefore decreases the calculated NPV. Option A is incorrect because the NPV formula discounts cash flows at the WACC, not the IRR. Option C is incorrect because a project's IRR can be greater than, equal to, or less than the WACC and still result in a positive NPV. Option D is incorrect because a project's IRR must be greater than the WACC for the NPV to be positive. Option E is incorrect because lower WACCs are typically used for less risky projects, not more risky ones.

Question 12

Which of the following statements is CORRECT?

Accepted Answer

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

Question 13

Which of the following statements is CORRECT?

Accepted Answer

Multiple IRRs can exist for projects with non-normal cash flows, but multiple MIRRs cannot exist. This is because the MIRR uses a single cost of capital to discount both cash inflows and outflows, which eliminates the possibility of multiple MIRRs. This is one reason why the MIRR is considered to be a better method than the regular IRR.

Question 14

Which of the following statements is CORRECT?

Accepted Answer

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

Question 15

Projects C and D are mutually exclusive and have normal cash flows.Project C has a higher NPV if the WACC is less than 12%, whereas Project D has a higher NPV if the WACC exceeds 12%.Which of the following statements is CORRECT?

Accepted Answer

The answer of Projects C and D are mutually exclusive...

Question 16

Which of the following statements is CORRECT?

Accepted Answer

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

Question 17

Which of the following statements is CORRECT?

Accepted Answer

An NPV profile graph is designed to show how a project's net present value (NPV) varies with the cost of capital. It helps decision makers determine the appropriate cost of capital and its impact on the project's value to the firm. The slope of the NPV profile graph will depend on the cash flow pattern of the project, not on the project's life, so statement B is incorrect. Statement A is also incorrect as the NPV profile graph shows how a project's NPV varies, not its payback. Statement C is also incorrect as the NPV profile graph is not designed to show a project's risk profile. Finally, statement E is incorrect as we can draw an NPV profile graph using various cost of capital assumptions without knowing the exact WACC for the project.

Question 18

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

If a project has normal cash flows and its IRR exceeds its WACC, then the project's NPV must be positive. This is because the IRR represents the discount rate at which the present value of future cash inflows equals the initial outflow. If the IRR is higher than the WACC, it means that the project is expected to generate returns higher than the cost of capital, thus contributing positively to the firm's value. Therefore, the project's NPV must be positive. Option A is incorrect because a higher IRR indicates a higher return on investment, resulting in higher NPV. Option B is also incorrect because IRR and NPV can provide conflicting rankings for mutually exclusive projects. Option C is incorrect because the IRR calculation does not assume anything about the reinvestment of cash flows. Option D is incorrect because the IRR calculation assumes that cash flows are reinvested at the IRR itself.

Question 19

Assume that the economy is enjoying a strong boom, and as a result interest rates and money costs generally are relatively high.The WACC for two mutually exclusive projects that are being considered is 12%.Project S has an IRR of 20% while Project L's IRR is 15%.The projects have the same NPV at the 12% current WACC.However, you believe that the economy will soon fall into a mild recession, and money costs and thus your WACC will soon decline.You also think that the projects will not be funded until the WACC has decreased, and their cash flows will not be affected by the change in economic conditions.Under these conditions, which of the following statements is CORRECT?

Accepted Answer

The answer of Assume that the economy is enjoying a...

Question 20

Which of the following statements is CORRECT?

Accepted Answer

The MIRR method assumes a more reasonable reinvestment rate assumption than the regular IRR method. This is because the MIRR assumes that cash flows are reinvested at the firm's cost of capital, which is generally a more realistic assumption than assuming reinvestment at the IRR rate. Therefore, statement C is correct. The other statements are incorrect. Statement A is incorrect because the MIRR and NPV decision criteria can conflict in certain situations, such as when one project has a higher NPV but a lower MIRR than another project. Statement B is incorrect because the MIRR method is not subject to the multiple IRR problem like the regular IRR method. Statement D is incorrect because the higher the WACC, the longer the discounted payback period, not the shorter. Statement E is partially correct, but incomplete. The MIRR method assumes that cash flows are reinvested at the firm's cost of capital up to the point of the crossover rate, and then at the cost of borrowing after that point.

Quiz 10: Capital Budgeting

Projects A and B have identical expected lives and identical initial cash outflows (costs) Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Suppose a firm relies exclusively on the payback method when making capital budgeting decisions, and it sets a 4-year payback regardless of economic conditions.Other things held constant, which of the following statements is most likely to be true?

Assume a project has normal cash flows.All else equal, which of the following statements is CORRECT?

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?

Which of the following statements is CORRECT?

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.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Projects C and D are mutually exclusive and have normal cash flows.Project C has a higher NPV if the WACC is less than 12%, whereas Project D has a higher NPV if the WACC exceeds 12%.Which of the following statements is CORRECT?

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.

Which of the following statements is CORRECT?