Question 1

Which of the following statements is CORRECT?

Accepted Answer

A)   the npv method assumes that cash flows will be reinvested at the risk-free rate, while the irr method assumes reinvestment at the irr.
B)   the npv method assumes that cash flows will be reinvested at the cost of capital, while the irr method assumes reinvestment at the risk-free rate.
C)   the npv method does not consider all relevant cash flows, particularly cash flows beyond the payback period.
D)   the irr method does not consider all relevant cash flows, particularly cash flows beyond the payback period.
E)   the npv method assumes that cash flows will be reinvested at the cost of capital, while the irr method assumes reinvestment at the irr.F) A) and E)
G) A) and B)

Question 2

Which of the following statements is CORRECT?Assume that the project being considered has normal cash flows, with one cash outflow at t = 0 followed by a series of positive cash flows.

Accepted Answer

A)   a project's mirr is always less than its regular irr.
B)   if a project's irr is greater than its cost of capital, then its mirr will be greater than the irr.
C)   to find a project's mirr, we compound cash inflows at the regular irr and then find the discount rate that causes the pv of the terminal value to equal the initial cost.
D)   to find a project's mirr, the textbook procedure compounds cash inflows at the cost of capital and then finds the discount rate that causes the pv of the terminal value to equal the initial cost.
E)   a project's mirr is always greater than its regular irr.F) B) and E)
G) C) and E)

Question 3

Craig's Car Wash Inc. is considering a project that has the following cash flow and cost of capital (r)  data. What is the project's discounted payback?  r=10.00% Year 0123 Cash flows −$900$500$500$500\begin{array}{lcccc}&r=10.00 \%\	ext { Year } & 0 & 1 & 2 & 3 \ 	ext { Cash flows } & -\$ 900 & \$ 500 & \$ 500 & \$ 500\end{array} Year  Cash flows ​r=10.00%0−$900​1$500​2$500​3$500​

Accepted Answer

A)   1.88 years
B)   2.09 years
C)   2.29 years
D)   2.52 years
E)   2.78 years F) B) and D)
G) B) and C)

Question 4

McGlothin Inc. is considering a project that has the following cash flow data. What is the project's payback?
  Year 0123 Cash flows −$1,150$500$500$500\begin{array} { l c c c c } 	ext { Year } & 0 & 1 & 2 & 3 \	ext { Cash flows } & - \$ 1,150 & \$ 500 & \$ 500 & \$ 500\end{array} Year  Cash flows ​0−$1,150​1$500​2$500​3$500​

Accepted Answer

A)   1.86 years
B)   2.07 years
C)   2.30 years
D)   2.53 years
E)   2.78 years F) A) and B)
G) C) and D)

Question 5

Wiley's Wire Products is considering a project that has the following cash flow and cost of capital (r)  data. What is the project's MIRR?Note that a project's MIRR can be less than the cost of capital (and even negative) , in which case it will be rejected.  r=11.00% Year 0123 Cash flows −$800$350$350$350\begin{array}{lcccc}&r=11.00 \%\	ext { Year } & 0 & 1 & 2 & 3 \ 	ext { Cash flows } & -\$ 800 & \$ 350 & \$ 350 & \$ 350\end{array} Year  Cash flows ​r=11.00%0−$800​1$350​2$350​3$350​

Accepted Answer

A)   8.86%
B)   9.84%
C)   10.94%
D)   12.15%
E)   13.50% F) B) and D)
G) A) and D)

Question 6

Which of the following statements is CORRECT?

Accepted Answer

A)   one defect of the irr method is that it does not take account of the time value of money.
B)   one defect of the irr method is that it does not take account of the cost of capital.
C)   one defect of the irr method is that it values a dollar received today the same as a dollar that will not be received until sometime in the future.
D)   one defect of the irr method is that it assumes that the cash flows to be received from a project can be reinvested at the irr itself, and that assumption is often not valid.
E)   one defect of the irr method is that it does not take account of cash flows over a project's full life.F) C) and D)
G) A) and E)

Question 7

Current Design Co. is considering two mutually exclusive, equally risky, and not repeatable projects, S and L. Their cash flows are shown below. The CEO believes the IRR is the best selection criterion, while the CFO advocates the NPV. If the decision is made by choosing the project with the higher IRR rather than the one with the higher NPV, how much, if any, value will be forgone, i.e., what's the chosen NPV versus the maximum possible NPV? Note that (1)  "true value" is measured by NPV, and (2)  under some conditions the choice of IRR vs. NPV will have no effect on the value gained or lost.  r7.50% Year 01234CFS−$1,100$550$600$100$100CFL−$2,700$650$725$800$1,400\begin{array}{cccccr}r& 7.50 \% & & & \	ext { Year } & 0 & 1 & 2 & 3 & 4 \\mathrm{CF}_{\mathrm{S}} & -\$ 1,100 & \$ 550 & \$ 600 & \$ 100 & \$ 100 \\mathrm{CF}_{\mathrm{L}} & -\$ 2,700 & \$ 650 & \$ 725 & \$ 800 & \$ 1,400\end{array}r Year CFS​CFL​​7.50%0−$1,100−$2,700​1$550$650​2$600$725​3$100$800​4$100$1,400​

Accepted Answer

A)   $138.10
B)   $149.21
C)   $160.31
D)   $171.42
E)   $182.52 F) B) and D)
G) A) and D)

Question 8

The NPV method's assumption that cash inflows are reinvested at the cost of capital is generally more reasonable than the IRR's assumption that cash flows are reinvested at the IRR. This is an important reason why the NPV method is generally preferred over the IRR method.

Accepted Answer

A) True 
 B)False

Exam 12: Capital Budgeting: Decision Criteria

Which of the following statements is CORRECT?Assume that the project being considered has normal cash flows, with one cash outflow at t = 0 followed by a series of positive cash flows.

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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McGlothin Inc. is considering a project that has the following cash flow data. What is the project's payback? $\begin{array} { l c c c c } \text { Year } & 0 & 1 & 2 & 3 \\\text { Cash flows } & - \$ 1,150 & \$ 500 & \$ 500 & \$ 500\end{array}$

Correct Answer
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Correct Answer
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The NPV method's assumption that cash inflows are reinvested at the cost of capital is generally more reasonable than the IRR's assumption that cash flows are reinvested at the IRR. This is an important reason why the NPV method is generally preferred over the IRR method.

Correct Answer
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Craig's Car Wash Inc. is considering a project that has the following cash flow and cost of capital (r) data. What is the project's discounted payback? $\begin{array}{lcccc}&r=10.00 \%\\\text { Year } & 0 & 1 & 2 & 3 \\ \text { Cash flows } & -\$ 900 & \$ 500 & \$ 500 & \$ 500\end{array}$

Correct Answer
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Which of the following statements is CORRECT?

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Exam 12: Capital Budgeting: Decision Criteria

Which of the following statements is CORRECT?Assume that the project being considered has normal cash flows, with one cash outflow at t = 0 followed by a series of positive cash flows.

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Which of the following statements is CORRECT?

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The NPV method's assumption that cash inflows are reinvested at the cost of capital is generally more reasonable than the IRR's assumption that cash flows are reinvested at the IRR. This is an important reason why the NPV method is generally preferred over the IRR method.

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Which of the following statements is CORRECT?

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