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Which of the following statements is CORRECT?


A) For a project to have more than one IRR, then both IRRs must be greater than the WACC.
B) If two projects are mutually exclusive, then they are likely to have multiple IRRs.
C) If a project is independent, then it cannot have multiple IRRs.
D) Multiple IRRs can only occur if the signs of the cash flows change more than once.
E) If a project has two IRRs, then the smaller one is the one that is most relevant, and it should be accepted and relied upon.

F) B) and E)
G) B) and D)

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The IRR method is based on the assumption that projects' cash flows are reinvested at the project's risk-adjusted cost of capital.

A) True
B) False

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Which of the following statements is CORRECT?


A) The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the IRR.
B) The NPV method assumes that cash flows will be reinvested at the risk-free rate, while the IRR method assumes reinvestment at the IRR.
C) The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the risk-free rate.
D) The NPV method does not consider all relevant cash flows, particularly cash flows beyond the payback period.
E) The IRR method does not consider all relevant cash flows, particularly cash flows beyond the payback period.

F) All of the above
G) None of the above

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Datta Computer Systems is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's projected IRR can be less than the WACC (and even negative) , in which case it will be rejected.


A) 9.70%
B) 10.78%
C) 11.98%
D) 13.31%
E) 14.64%

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

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Malholtra Inc. is considering a project that has the following cash flow and WACC data. What is the project's MIRR? Note that a project's projected MIRR can be less than the WACC (and even negative) , in which case it will be rejected.


A) 14.08%
B) 15.65%
C) 17.21%
D) 18.94%
E) 20.83%

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

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Resnick Inc. is considering a project that has the following cash flow data. What is the project's payback?


A) 1.42 years
B) 1.58 years
C) 1.75 years
D) 1.93 years
E) 2.12 years

F) C) and E)
G) A) and B)

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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) A) and E)
G) C) 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) A) and D)
G) None of the above

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


A) If the two projects' NPV profiles do not cross, 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) If the cost of capital is less 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.
D) For a conflict to exist between NPV and IRR, the initial investment cost of one project must exceed the cost of the other.
E) 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.

F) B) and C)
G) A) and E)

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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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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

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


A) A project's IRR increases as the WACC declines.
B) A project's NPV increases as the WACC declines.
C) A project's MIRR is unaffected by changes in the WACC.
D) A project's regular payback increases as the WACC declines.
E) A project's discounted payback increases as the WACC declines.

F) All of the above
G) C) and E)

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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.


A) The longer a project's payback period, the more desirable the project is normally considered to be by this criterion.
B) One drawback of the payback criterion for evaluating projects is that this method does not properly account for the time value of money.
C) If a project's payback is positive, then the project should be rejected because it must have a negative NPV.
D) The regular payback ignores cash flows beyond the payback period, but the discounted payback method overcomes this problem.
E) If a company uses the same payback requirement to evaluate all projects, say it requires a payback of 4 years or less, then the company will tend to reject projects with relatively short lives and accept long-lived projects, and this will cause its risk to increase over time.

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

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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.


A) A project's NPV is found by compounding the cash inflows at the IRR to find the terminal value (TV) , then discounting the TV at the WACC.
B) The lower the WACC used to calculate it, the lower the calculated NPV will be.
C) If a project's NPV is less than zero, then its IRR must be less than the WACC.
D) If a project's NPV is greater than zero, then its IRR must be less than zero.
E) The NPV of a relatively low-risk project should be found using a relatively high WACC.

F) None of the above
G) All of the above

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Nast 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 higher MIRR rather than the one with the higher NPV, how much value will be forgone? Note that under some conditions choosing projects on the basis of the MIRR will cause $0.00 value to be lost.


A) $32.12
B) $35.33
C) $38.87
D) $40.15
E) $42.16

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

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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

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

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Westchester Corp. is considering two equally risky, mutually exclusive projects, both of which have normal cash flows. Project A has an IRR of 11%, while Project B's IRR is 14%. When the WACC is 8%, the projects have the same NPV. Given this information, which of the following statements is CORRECT?


A) If the WACC is 13%, Project A's NPV will be higher than Project B's.
B) If the WACC is 9%, Project A's NPV will be higher than Project B's.
C) If the WACC is 6%, Project B's NPV will be higher than Project A's.
D) If the WACC is greater than 14%, Project A's IRR will exceed Project B's.
E) If the WACC is 9%, Project B's NPV will be higher than Project A's.

F) A) and B)
G) None of the above

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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

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Under certain conditions, a project may have more than one IRR. One such condition is when, in addition to the initial investment at time = 0, a negative cash flow (or cost) occurs at the end of the project's life.

A) True
B) False

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For a project with one initial cash outflow followed by a series of positive cash inflows, the modified IRR (MIRR) method involves compounding the cash inflows out to the end of the project's life, summing those compounded cash flows to form a terminal value (TV), and then finding the discount rate that causes the PV of the TV to equal the project's cost.

A) True
B) False

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