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Both the regular and the modified IRR (MIRR) methods have wide appeal to professors, but most business executives prefer the NPV method to either of the IRR methods.

A) True
B) False

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The primary reason that the NPV method is conceptually superior to the IRR method for evaluating mutually exclusive investments is that multiple IRRs may exist, and when that happens, we don't know which IRR is relevant.

A) True
B) False

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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. 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%


A) 9.43%
B) 9.91%
C) 10.40%
D) 10.92%
E) 11.47%

F) B) and C)
G) A) and D)

Correct Answer

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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.

F) C) and D)
G) B) and C)

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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. 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


A) $265.65
B) $278.93
C) $292.88
D) $307.52
E) $322.90

F) C) and E)
G) D) and E)

Correct Answer

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Mansi Inc. is considering a project that has the following cash flow data. What is the project's payback? 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 E) 2.85 years


A) 1.91 years
B) 2.12 years
C) 2.36 years
D) 2.59 years
E) 2.85 years

F) A) and C)
G) D) and E)

Correct Answer

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When considering two mutually exclusive projects, the firm should always select the project whose internal rate of return is the highest, provided the projects have the same initial cost. This statement is true regardless of whether the projects can be repeated or not.

A) True
B) False

Correct Answer

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A firm should never accept a project if its acceptance would lead to an increase in the firm's cost of capital (its WACC).

A) True
B) False

Correct Answer

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Other things held constant, an increase in the cost of capital will result in a decrease in a project's IRR.

A) True
B) False

Correct Answer

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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. 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%


A) 12.55%
B) 13.21%
C) 13.87%
D) 14.56%
E) 15.29%

F) A) and E)
G) D) and E)

Correct Answer

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A basic rule in capital budgeting is that If a project's NPV exceeds its IRR, then the project should be accepted.

A) True
B) False

Correct Answer

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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.

A) True
B) False

Correct Answer

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Moerdyk & Co. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the higher IRR, how much value will be forgone? Note that under certain conditions choosing projects on the basis of the IRR will not cause any value to be lost because the project with the higher IRR will also have the higher NPV, i.e., no conflict will exist. Moerdyk & Co. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the higher IRR, how much value will be forgone? Note that under certain conditions choosing projects on the basis of the IRR will not cause any value to be lost because the project with the higher IRR will also have the higher NPV, i.e., no conflict will exist. A) $5.47 B) $6.02 C) $6.62 D) $7.29 E) $7.82


A) $5.47
B) $6.02
C) $6.62
D) $7.29
E) $7.82

F) All of the above
G) A) and D)

Correct Answer

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If 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.

A) True
B) False

Correct Answer

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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?


A) Project D probably has a higher IRR.
B) Project D is probably larger in scale than Project C.
C) Project C probably has a faster payback.
D) Project C probably has a higher IRR.
E) The crossover rate between the two projects is below 12%.

F) D) and E)
G) C) and D)

Correct Answer

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Because "present value" refers to the value of cash flows that occur at different points in time, a series of present values of cash flows should not be summed to determine the value of a capital budgeting project.

A) True
B) False

Correct Answer

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One advantage of the payback method for evaluating potential investments is that it provides information about a project's liquidity and risk.

A) True
B) False

Correct Answer

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Yonan Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the shorter payback, some value may be forgone. How much value will be lost in this instance? Note that under some conditions choosing projects on the basis of the shorter payback will not cause value to be lost. Yonan Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the shorter payback, some value may be forgone. How much value will be lost in this instance? Note that under some conditions choosing projects on the basis of the shorter payback will not cause value to be lost. A) $24.14 B) $26.82 C) $29.80 D) $33.11 E) $36.42


A) $24.14
B) $26.82
C) $29.80
D) $33.11
E) $36.42

F) All of the above
G) A) and B)

Correct Answer

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Stern Associates is considering a project that has the following cash flow data. What is the project's payback? Stern Associates is considering a project that has the following cash flow data. What is the project's payback? A) 2.31 years B) 2.56 years C) 2.85 years D) 3.16 years E) 3.52 years


A) 2.31 years
B) 2.56 years
C) 2.85 years
D) 3.16 years
E) 3.52 years

F) A) and C)
G) A) and D)

Correct Answer

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Conflicts between two mutually exclusive projects occasionally occur, where the NPV method ranks one project higher but the IRR method ranks the other one first. In theory, such conflicts should be resolved in favor of the project with the higher positive IRR.

A) True
B) False

Correct Answer

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Showing 41 - 60 of 98

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