Question 1

The IRR is defined as
A)the discount rate that makes a project's NPV equal to zero.
B)the difference between the cost of capital and the present value of the cash flows.
C)the discount rate used in the NPV method.
D)the discount rate used in the discounted payback period method.

Accepted Answer

The IRR (Internal Rate of Return) is the discount rate that makes a project's NPV (Net Present Value) equal to zero. This means that at the IRR, the project will neither earn nor lose money, making it a critical measure for evaluating investment opportunities. Option B is incorrect because the IRR is not the difference between the cost of capital and the present value of the cash flows. Options C and D are also incorrect because the discount rate used in the NPV method is the cost of capital, while the discounted payback period method does not use the IRR.

Question 2

If the sign of the cash flows for a project changes two times, then the project likely has
A)one IRR.
B)two IRRs.
C)three IRRs.
D)four IRRs.

Accepted Answer

A change in sign of the cash flows indicates multiple sign reversals in the NPV profile. In this case, there will be two IRRs for the project.

Question 3

Dry-Sand Company is considering investing in a new project.The project will need an initial investment of $1,200,000 and will generate $600,000 (after-tax) cash flows for three years.However, at the end of the fourth year, the project will generate -$500,000 of after-tax cash flow due to dismantling costs.Calculate the MIRR (modified internal rate of return) for the project if the cost of capital is 15 percent.
A)8.1 percent
B)12.6 percent
C)28.2 percent
D)20.4 percent

Accepted Answer

The MIRR is 8.1 percent. The MIRR is calculated by finding the internal rate of return (IRR) of the project's cash flows, and then adjusting the IRR for the cost of capital. The IRR is the discount rate that makes the net present value of the project's cash flows equal to zero. The MIRR is calculated by finding the IRR of the project's cash flows, and then adjusting the IRR for the cost of capital. The MIRR is calculated by finding the IRR of the project's cash flows, and then adjusting the IRR for the cost of capital.

Question 4

Music Company is considering investing in a new project.The project will need an initial investment of $2,400,000 and will generate $1,200,000 (after-tax) cash flows for three years.Calculate the NPV for the project if the cost of capital is 15 percent.
A)$169, 935
B)$1,200,000
C)$339,870
D)$125,846

Accepted Answer

Using the formula for NPV:
NPV = -Initial Investment + (Cash flow1/ (1+Cost of Capital)^1) + (Cash flow2/(1+Cost of Capital)^2) + (Cash flow3/(1+Cost of Capital)^3)

NPV = -2,400,000 + (1,200,000/1.15)^1 + (1,200,000/(1.15)^2) + (1,200,000/(1.15)^3) = $339,870

Therefore, the option C is the best choice.

Question 5

Driscoll Company is considering investing in a new project.The project will need an initial investment of $2,400,000 and will generate $1,200,000 (after-tax) cash flows for three years.Calculate the IRR for the project.
A)14.5 percent
B)18.6 percent
C)20.2 percent
D)23.4 percent

Accepted Answer

The answer of Driscoll Company is considering investing in a...

Question 6

Project X has the following cash flows: C₀ = +2,000, C₁ = -1,150, and C₂ = -1,150.If the IRR of the project is 9.85 percent and if the cost of capital is 12.00 percent, you would A)accept the project. B)reject the project.

Accepted Answer

The answer of Project X has the following cash flows:...

Question 7

If the cash flows for Project M are C₀ = -1,000; C₁ = +200; C₂ = +700; and C₃ = +698, calculate the IRR for the project. A)23 percent B)21 percent C)19 percent D)17 percent

Accepted Answer

To calculate IRR, we need to solve for the discount rate that sets the net present value (NPV) of all future cash flows to zero. Using the given cash flows, we can calculate the NPV at different discount rates and find the discount rate that makes the NPV equal to zero.

Using a financial calculator or spreadsheet software, we find that the IRR for Project M is approximately 23 percent. Therefore, the best choice is A) 23 percent.

Question 8

The following are some of the shortcomings of the IRR method except
A)IRR is conceptually easy to communicate.
B)projects can have multiple IRRs.
C)IRR cannot distinguish between a borrowing project and a lending project.
D)it is very cumbersome to evaluate mutually exclusive projects using the IRR method.

Accepted Answer

This question asks for the shortcomings of the IRR method "except," meaning that the correct answer is a statement that does not apply as a shortcoming of IRR. Choices B, C, and D are all true shortcomings of the IRR method. Option A, however, is not a shortcoming but rather a strength of the method, as it is a commonly used and understandable metric.

Question 9

Internal rate of return (IRR) method is also called the
A)discounted payback period method.
B)discounted cash flow (DCF) rate of return method.
C)modified internal rate of return (MIRR) method.
D)book rate of return method.

Accepted Answer

The Internal rate of return (IRR) method is also known as the Discounted Cash Flow (DCF) rate of return method. It is a widely used capital budgeting technique that measures the profitability of an investment by calculating the discount rate that makes the net present value (NPV) of the investment equal to zero. The other options listed are incorrect. The discounted payback period method and book rate of return method are not related to the IRR method, while the modified internal rate of return (MIRR) method is a variation of the IRR method.

Question 10

Project X has the following cash flows: C₀ = +2,000, C₁ = -1,300, and C₂ = -1,500.If the IRR of the project is 25 percent and if the cost of capital is 18 percent, you would A)accept the project. B)reject the project.

Accepted Answer

The answer of Project X has the following cash flows:...

Question 11

One can use the profitability index most usefully for which situation?
A)When capital rationing exists
B)Evaluation of exceptionally long-term projects
C)Evaluation of nonnormal projects
D)When a project has unusually high cash flow uncertainty

Accepted Answer

The profitability index is a useful tool when capital rationing exists, as it allows companies to prioritize projects based on their expected return on investment. By comparing the present value of a project's expected cash flows to the initial investment required, the profitability index helps managers determine which projects will generate the most value per dollar invested. This is especially important when capital is limited, as it allows companies to maximize their returns while staying within budget constraints.

Question 12

If the cash flows for project A are C₀ = -3,000, C₁ = +500; C₂ = +1,500; and C₃ = +5,000, calculate the NPV of the project using a 15 percent discount rate. A)$5,000 B)$2,352 C)$3,201 D)$1,857

Accepted Answer

The answer of If the cash flows for project A...

Question 13

Mass Company is investing in a giant crane.It is expected to cost $6 million in initial investment, and it is expected to generate an end-of-year cash flow of $3 million each year for three years.At the end of the fourth year, there will be a $1 million disposal cost.Calculate the MIRR for the project if the cost of capital is 12 percent.
A)17.8 percent
B)15.3 percent
C)23.8 percent
D)22.1 percent

Accepted Answer

To calculate the MIRR, we need to find the present value of all the cash flows at the cost of capital, and then find the discount rate that makes the PV of cash inflows equal to the PV of cash outflows.
PV of cash inflows: 
Year 1: $3 million / (1+0.12)^1 = $2.68 million
Year 2: $3 million / (1+0.12)^2 = $2.39 million
Year 3: $3 million / (1+0.12)^3 = $2.13 million
Year 4: -$1 million / (1+0.12)^4 = -$0.56 million (negative sign because it's a cash outflow)
Total PV of cash inflows = $2.68 + $2.39 + $2.13 - $0.56 = $6.64 million

PV of initial investment: 
$6 million / (1+0.12)^0 = $6 million

Total PV of cash outflows = $6 million + $1 million = $7 million

Now we need to find the discount rate that equates the PV of cash inflows with the PV of cash outflows using the MIRR function in Excel or any financial calculator. The MIRR in this case is 17.8%, which is the rate at which the project's NPV would be 0. Therefore, the best choice is A.

Question 14

Which of the following methods of evaluating capital investment projects incorporates the time value of money concept?
A)Payback period, discounted payback period, and net present value (NPV) only
B)Discounted payback period, net present value (NPV),and internal rate of return only
C)Net present value (NPV) and internal rate of return only
D)Payback period, discounted payback period, net present value (NPV), and internal rate of return

Accepted Answer

The discounted payback period, net present value (NPV), and internal rate of return all incorporate the time value of money concept. The payback period and simple discounted payback period do not consider the time value of money.

Question 15

If an investment project (normal project) has an IRR equal to the cost of capital, the NPV for that project is
A)positive.
B)negative.
C)zero.
D)unable to be determined.

Accepted Answer

When the IRR equals the cost of capital, the net present value (NPV) of the project is zero. This means that the project is expected to generate a return that is just enough to cover the cost of capital, and there is no surplus that can be used to generate additional value for the investors. Hence, the correct choice is C.

Question 16

Project Y has following cash flows: C₀ = -800, C₁ = +5,000, and C₂ = -5,000.Calculate the IRRs for the project. A)25 percent and 400 percent. B)125 percent and 500 percent. C)-44 percent and 11.6 percent. D)No IRRs exist for this project.

Accepted Answer

The IRR (Internal Rate of Return) is found by solving the equation 0 = -800 + 5000/(1+IRR) - 5000/(1+IRR)^2. This equation has two solutions, which are 25% and 400%, indicating the project has two IRRs.

Question 17

Muscle Company is investing in a giant crane.It is expected to cost $6.5 million in initial investment, and it is expected to generate an end-of-year cash flow of $3.0 million each year for three years.Calculate the IRR.
A)14.6 percent
B)16.4 percent
C)18.2 percent
D)22.1 percent

Accepted Answer

The answer of Muscle Company is investing in a giant...

Question 18

Story Company is investing in a giant crane.It is expected to cost $6 million in initial investment, and it is expected to generate an end-of-year after-tax cash flow of $3 million each year for three years.Calculate the NPV at 12 percent.
A)$2.40 million
B)$1.20 million
C)$0.80 million
D)$0.20 million

Accepted Answer

The answer of Story Company is investing in a giant...

Question 19

A project will have only one internal rate of return if
A)the net present value is positive.
B)the net present value is negative.
C)the cash flows decline over the life of the project.
D)there is a one-sign change in the cash flows.

Accepted Answer

A project will have only one internal rate of return if there is a one-sign change in the cash flows. If there are multiple sign changes in the cash flows, there can be multiple internal rates of return or no internal rate of return at all. The net present value being positive or negative does not determine the number of internal rates of return. Similarly, the cash flows declining over the life of the project does not affect the calculation of the internal rate of return.

Question 20

The quickest way to calculate the internal rate of return (IRR) of a project is by
A)trial and error method.
B)using the graphical method.
C)using a financial calculator.
D)doubling the opportunity cost of capital.

Accepted Answer

Using a financial calculator is the quickest and most accurate way to calculate the internal rate of return (IRR) of a project, as it saves time and eliminates errors that might occur during the trial and error or graphical method. Doubling the opportunity cost of capital is not a valid method for calculating IRR, and it may not give an accurate result.

Quiz 5: Net Present Value and Other Investment Criteria

The IRR is defined as

If the sign of the cash flows for a project changes two times, then the project likely has

Music Company is considering investing in a new project.The project will need an initial investment of $2,400,000 and will generate $1,200,000 (after-tax) cash flows for three years.Calculate the NPV for the project if the cost of capital is 15 percent.

Driscoll Company is considering investing in a new project.The project will need an initial investment of $2,400,000 and will generate $1,200,000 (after-tax) cash flows for three years.Calculate the IRR for the project.

Project X has the following cash flows: C0 = +2,000, C1 = -1,150, and C2 = -1,150.If the IRR of the project is 9.85 percent and if the cost of capital is 12.00 percent, you would

If the cash flows for Project M are C0 = -1,000; C1 = +200; C2 = +700; and C3 = +698, calculate the IRR for the project.

The following are some of the shortcomings of the IRR method except

Internal rate of return (IRR) method is also called the

Project X has the following cash flows: C0 = +2,000, C1 = -1,300, and C2 = -1,500.If the IRR of the project is 25 percent and if the cost of capital is 18 percent, you would

One can use the profitability index most usefully for which situation?

If the cash flows for project A are C0 = -3,000, C1 = +500; C2 = +1,500; and C3 = +5,000, calculate the NPV of the project using a 15 percent discount rate.

Which of the following methods of evaluating capital investment projects incorporates the time value of money concept?

If an investment project (normal project) has an IRR equal to the cost of capital, the NPV for that project is

Project Y has following cash flows: C0 = -800, C1 = +5,000, and C2 = -5,000.Calculate the IRRs for the project.

Muscle Company is investing in a giant crane.It is expected to cost $6.5 million in initial investment, and it is expected to generate an end-of-year cash flow of $3.0 million each year for three years.Calculate the IRR.

Story Company is investing in a giant crane.It is expected to cost $6 million in initial investment, and it is expected to generate an end-of-year after-tax cash flow of $3 million each year for three years.Calculate the NPV at 12 percent.

A project will have only one internal rate of return if

The quickest way to calculate the internal rate of return (IRR) of a project is by

Project X has the following cash flows: C₀ = +2,000, C₁ = -1,150, and C₂ = -1,150.If the IRR of the project is 9.85 percent and if the cost of capital is 12.00 percent, you would

If the cash flows for Project M are C₀ = -1,000; C₁ = +200; C₂ = +700; and C₃ = +698, calculate the IRR for the project.

Project X has the following cash flows: C₀ = +2,000, C₁ = -1,300, and C₂ = -1,500.If the IRR of the project is 25 percent and if the cost of capital is 18 percent, you would

If the cash flows for project A are C₀ = -3,000, C₁ = +500; C₂ = +1,500; and C₃ = +5,000, calculate the NPV of the project using a 15 percent discount rate.

Project Y has following cash flows: C₀ = -800, C₁ = +5,000, and C₂ = -5,000.Calculate the IRRs for the project.