Question 1

Levin Company is considering a project that has the following cash flow data.What is the project's IRR?   Year:  Cash flows: 01234−$1,000$400$400$400$400\begin{array}{l}\begin{array}{l}	ext { Year: } \	ext { Cash flows: }\end{array}\begin{array}{cccc}0 & 1 & 2 & 3 & 4 \\hline-\$ 1,000 & \$ 400 & \$ 400 & \$ 400 & \$ 400\end{array}\end{array} Year:  Cash flows: ​0−$1,000​1$400​2$400​3$400​4$400​​​

Accepted Answer

A)  15.94%
B)  17.71%
C)  19.68%
D)  21.86% E) B) and C)
F) All of the above

Question 2

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

Accepted Answer

A)  If the two projects' NPV profiles do not cross in the upper right quadrant, 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. One project will rank higher by both criteria.
C)  For a conflict to exist between NPV and IRR, the initial investment cost of one project must exceed the cost of the other.
D)  For a conflict to exist between NPV and IRR, one project must have an increasing stream of cash flows over time while the other has a decreasing stream. If both sets of cash flows are increasing or decreasing, then it would be impossible for a conflict to exist, even if one project is larger than the other.E) All of the above
F) C) and D)

Question 3

Assuming that their NPVs based on the firm's cost of capital are equal,the NPV of a project whose cash flows accrue relatively rapidly will be more sensitive to changes in the discount rate than the NPV of a project whose cash flows come in later in its life.

Accepted Answer

A) True 
 B)False

Question 4

Project A and B both have positive NPVs.If A and B are mutually exclusive,others thing held constant,which project will management accept?

Accepted Answer

A)  Management will accept the project with the lower NPV.
B)  Management will accept the project with the higher NPV.
C)  Management will accept both A and B since they both have positive NPVs.
D)  When projects are mutually exclusive, the NPV rule is ignored and neither project is accepted.E) All of the above
F) A) and D)

Question 5

Energy Project Beta has the following cash flows:CF 0 -$4,000CF 1 $0CF 2 $0CF 3 $1,000CF 4 $3,000CF 5 $7,000If this project has a required rate of return of 10%,will management accept or reject the project?NPV @ r =10% = $3,147 (rounded up)

Accepted Answer

A)  Management would reject the project because there are no cash flows greater than zero in years 1 and 2.
B)  Management would reject the project because the project has a NPV of $8,000.
C)  Management would reject the project because the project has a NPV of $3,147.
D)  Management would reject the project because the project has a NPV of $5,067.E) A) and B)
F) A) and C)

Question 6

As of 2011,which method of capital budgeting was preferred in Canada?

Accepted Answer

A)  payback period
B)  IRR
C)  NPV
D)  accounting rate of returnE) C) and D)
F) A) and B)

Question 7

Aubey Inc.is considering two projects that have the following cash flows:​​​   Project 1  Project 2  Year  Cash Flow  Cash Flow 0−$2,000−$1,90015001,1002700900380080041,00060051,100400\begin{array}{lrr} & 	ext { Project 1 } & {	ext { Project 2 }} \ 	ext { Year }& 	ext{ Cash Flow }&	ext { Cash Flow }\\hline 0 & -\$ 2,000 & -\$ 1,900 \1 & 500 & 1,100 \2 & 700 & 900 \3 & 800 & 800 \4 & 1,000 & 600 \5 & 1,100 & 400\end{array} Year 012345​ Project 1  Cash Flow −$2,0005007008001,0001,100​ Project 2  Cash Flow −$1,9001,100900800600400​​  ​At what cost of capital would the two projects have the same NPV?

Accepted Answer

A)  4.73%
B)  5.85%
C)  6.70%
D)  7.50% E) A) and B)
F) All of the above

Question 8

Which of the following statements is correct?

Accepted Answer

A)  The MIRR and NPV decision criteria can never conflict.
B)  The IRR method can never be subject to the multiple IRR problem, while the MIRR method can be.
C)  One reason some people prefer the MIRR to the regular IRR is that the MIRR is based on what is generally a more reasonable assumption about the reinvestment rate than the regular IRR.
D)  The higher the WACC, the shorter the discounted payback period.E) B) and C)
F) A) and D)

Question 9

Which statement regarding normal cash flows is correct?

Accepted Answer

A)  If a project has normal cash flows, then its IRR must be positive.
B)  If a project has normal cash flows, then its MIRR must be positive.
C)  If a project has normal cash flows, then it will have exactly two real IRRs.
D)  If a project has normal cash flows, then it can have only one real IRR, whereas a project with non-normal cash flows might have more than one real IRR.E) All of the above
F) None of the above

Question 10

Bey Bikes is considering a project that has the following cash flow and WACC data.What is the project's discounted payback?   WACC: 10.00% Year: 01234 Cash flows: −$1,000$525$485$445$405\begin{array}{lcccc}	ext { WACC: } & 10.00 \% \	ext { Year: } & 0 & 1 & 2 & 3 &4\\hline  	ext { Cash flows: } & -\$ 1,000 & \$ 525 & \$ 485 & \$ 445 & \$ 405\end{array} WACC:  Year:  Cash flows: ​10.00%0−$1,000​1$525​2$485​3$445​4$405​​

Accepted Answer

A)  1.72 years
B)  1.92 years
C)  2.13 years
D)  2.36 years E) None of the above
F) A) and D)

Question 11

A project has a series of non-normal cash flows that result in a terminal value (TV)  of $25,000 in 10 years.If the project's initial costs are $7,500,what is your recommendation regarding this project to management (accept/reject) ?

Accepted Answer

A)  accept as the MIRR is 12.79%
B)  reject as the MIRR is greater than zero
C)  accept as the terminal value is greater than the present value of the costs
D)  accept as the MIRR is 12.50%E) A) and B)
F) A) and C)

Question 12

A small manufacturer is considering two alternative machines.Machine A costs $1.0 million,has an expected life of 5 years,and generates after-tax cash flows of $350,000 per year.At the end of 5 years,the salvage value of the machine is zero,but the company will be able to purchase another Machine A at a cost of $1.2 million.The second Machine A will generate after-tax cash flows of $375,000 a year for another 5 years,at which time its salvage value will again be zero.Alternatively,the company can buy Machine B at a cost of $1.5 million today.Machine B will produce after-tax cash flows of $400,000 a year for 10 years,after which it will have an after-tax salvage value of $100,000.Assume that the cost of capital is 12%.Based on the equivalent annual annuity,if the company chooses the machine that adds the most value to the firm,by how much will the company's value increase per year?

Accepted Answer

A)  $792,286.54
B)  $347,802.00
C)  $140,227.71
D)  $61,557.88E) A) and D)
F) A) and C)

Question 13

Which of the following statements is correct?

Accepted Answer

A)  One advantage of the NPV over the IRR is that NPV takes account of cash flows over a project's full life whereas IRR does not.
B)  One advantage of the NPV over the IRR is that NPV assumes that cash flows will be reinvested at the WACC, whereas IRR assumes that cash flows are reinvested at the IRR. The NPV assumption is generally more likely to be appropriate.
C)  One advantage of the NPV over the MIRR method is that NPV takes account of cash flows over a project's full life whereas MIRR does not.
D)  One advantage of the NPV over the MIRR method is that NPV discounts cash flows whereas the MIRR is based on undiscounted cash flows.E) B) and C)
F) C) and D)

Question 14

Project S has a pattern of high cash flows in its early life,while Project L has a longer life,with large cash flows late in its life.Neither has negative cash flows after Year 0,and at the current cost of capital,the two projects have identical NPVs.Now,suppose interest rates and money costs decline,what will happen to projects S and L?

Accepted Answer

A)  Other things held constant, this change will cause L to become preferred to S.
B)  Other things held constant, this change will cause S to become preferred to L.
C)  Other things held constant, this change will cause L and S to have the same NPV.
D)  Other things held constant, money and interest rates will not affect the financial outcomes of S and L.E) B) and D)
F) None of the above

Question 15

If a firm is experiencing no capital rationing,it should accept all investment proposals whose accounting rate of return is equal to or greater than the weighted average cost of capital.

Accepted Answer

A) True 
 B)False

Question 16

Theoretically speaking,hard capital rationing does not exist.

Accepted Answer

A) True 
 B)False

Question 17

Which statement about a project's MIRR is correct? Assume that the project being considered has normal cash flows,with one outflow followed by a series of inflows.

Accepted Answer

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) A) and B)
F) B) and C)

Question 18

A firm is considering Projects S and L,whose cash flows are shown below.These projects are mutually exclusive,equally risky,and not repeatable.The CEO wants to use the IRR criterion,while the CFO favours the NPV method,and you were hired to advise the firm on the best procedure.If the CEO's preferred criterion is used,how much value will the firm lose as a result of this decision?   WACC: 13.00%01234CFSS−$1,025$375$380$385$390CFL−$2,150$750$759$768$777\begin{array}{ccccc}	ext { WACC: } & 13.00 \% \&0 & 1 & 2 & 3 & 4 \\hline \mathrm{CFS}_{\mathrm{S}} &-\$ 1,025 & \$ 375 & \$ 380 & \$ 385 & \$ 390 \\mathrm{CF}_{\mathrm{L}} &-\$ 2,150 & \$ 750 & \$ 759 & \$ 768 & \$ 777\end{array} WACC: CFSS​CFL​​13.00%0−$1,025−$2,150​1$375$750​2$380$759​3$385$768​4$390$777​​

Accepted Answer

A)  $5.83
B)  $6.14
C)  $6.46
D)  $6.79 E) B) and D)
F) C) and D)

Question 19

Garvin Enterprises is considering a project that has the following cash flow and WACC data.What is the project's discounted payback?   WACC: 10.00% Year: 0123 Cash flows: −$1,000$500$500$500\begin{array}{lcccc}	ext { WACC: } & 10.00 \% \	ext { Year: } & 0 & 1 & 2 & 3 \\hline  	ext { Cash flows: } & -\$ 1,000 & \$ 500 & \$ 500 & \$ 500\end{array} WACC:  Year:  Cash flows: ​10.00%0−$1,000​1$500​2$500​3$500​​

Accepted Answer

A)  2.12 years
B)  2.35 years
C)  2.59 years
D)  2.85 years E) A) and B)
F) None of the above

Question 20

Rentz Recreation Inc.is considering a project that has the following cash flow data.What is the project's IRR?   Year:  Cash flows: 01234−$650$250$230$210$190\begin{array}{l}\begin{array}{l}	ext { Year: } \	ext { Cash flows: }\end{array}\begin{array}{cccc}0 & 1 & 2 & 3 & 4 \\hline-\$ 650 & \$ 250 & \$ 230 & \$ 210 & \$ 190\end{array}\end{array} Year:  Cash flows: ​0−$650​1$250​2$230​3$210​4$190​​​

Accepted Answer

A)  14.04%
B)  15.44%
C)  16.99%
D)  18.69% E) A) and B)
F) All of the above

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

Correct Answer
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Correct Answer
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If a firm is experiencing no capital rationing,it should accept all investment proposals whose accounting rate of return is equal to or greater than the weighted average cost of capital.

Correct Answer
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Which of the following statements is correct?

Correct Answer
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Correct Answer
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Theoretically speaking,hard capital rationing does not exist.

Correct Answer
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A project has a series of non-normal cash flows that result in a terminal value (TV) of $25,000 in 10 years.If the project's initial costs are $7,500,what is your recommendation regarding this project to management (accept/reject) ?

Correct Answer
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Project A and B both have positive NPVs.If A and B are mutually exclusive,others thing held constant,which project will management accept?

Correct Answer
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Bey Bikes is considering a project that has the following cash flow and WACC data.What is the project's discounted payback? $\begin{array}{lcccc}\text { WACC: } & 10.00 \% \\\text { Year: } & 0 & 1 & 2 & 3 &4\\\hline \text { Cash flows: } & -\$ 1,000 & \$ 525 & \$ 485 & \$ 445 & \$ 405\end{array}$

Correct Answer
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Assuming that their NPVs based on the firm's cost of capital are equal,the NPV of a project whose cash flows accrue relatively rapidly will be more sensitive to changes in the discount rate than the NPV of a project whose cash flows come in later in its life.

Correct Answer
verified

Energy Project Beta has the following cash flows:CF 0 -$4,000CF 1 $0CF 2 $0CF 3 $1,000CF 4 $3,000CF 5 $7,000If this project has a required rate of return of 10%,will management accept or reject the project?NPV @ r =10% = $3,147 (rounded up)

Correct Answer
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Levin Company is considering a project that has the following cash flow data.What is the project's IRR? $\begin{array}{l}\begin{array}{l}\text { Year: } \\\text { Cash flows: }\end{array}\begin{array}{cccc}0 & 1 & 2 & 3 & 4 \\\hline-\$ 1,000 & \$ 400 & \$ 400 & \$ 400 & \$ 400\end{array}\end{array}$

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

Correct Answer
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Which statement about a project's MIRR is correct? Assume that the project being considered has normal cash flows,with one outflow followed by a series of inflows.

Correct Answer
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Correct Answer
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Which statement regarding normal cash flows is correct?

Correct Answer
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Which of the following statements is correct?

Correct Answer
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Correct Answer
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Garvin Enterprises is considering a project that has the following cash flow and WACC data.What is the project's discounted payback? $\begin{array}{lcccc}\text { WACC: } & 10.00 \% \\\text { Year: } & 0 & 1 & 2 & 3 \\\hline \text { Cash flows: } & -\$ 1,000 & \$ 500 & \$ 500 & \$ 500\end{array}$

Correct Answer
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As of 2011,which method of capital budgeting was preferred in Canada?

Correct Answer
verified

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

If a firm is experiencing no capital rationing,it should accept all investment proposals whose accounting rate of return is equal to or greater than the weighted average cost of capital.

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Theoretically speaking,hard capital rationing does not exist.

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A project has a series of non-normal cash flows that result in a terminal value (TV) of $25,000 in 10 years.If the project's initial costs are $7,500,what is your recommendation regarding this project to management (accept/reject) ?

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Project A and B both have positive NPVs.If A and B are mutually exclusive,others thing held constant,which project will management accept?

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Correct AnswerverifiedShow Answer

Assuming that their NPVs based on the firm's cost of capital are equal,the NPV of a project whose cash flows accrue relatively rapidly will be more sensitive to changes in the discount rate than the NPV of a project whose cash flows come in later in its life.

Correct AnswerverifiedShow Answer

Energy Project Beta has the following cash flows:CF 0 -$4,000CF 1 $0CF 2 $0CF 3 $1,000CF 4 $3,000CF 5 $7,000If this project has a required rate of return of 10%,will management accept or reject the project?NPV @ r =10% = $3,147 (rounded up)

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

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Which statement about a project's MIRR is correct? Assume that the project being considered has normal cash flows,with one outflow followed by a series of inflows.

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Which statement regarding normal cash flows is correct?

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Which of the following statements is correct?

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Correct AnswerverifiedShow Answer

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As of 2011,which method of capital budgeting was preferred in Canada?

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