Exam 12: The Basics of Capital Budgeting

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A) Each project must have a negative NPV.
B) Since the projects are mutually exclusive,the firm should always select Project B.
C) If the crossover rate is 8%,Project B will have the higher NPV.
D) Only one project has a positive NPV.
E) If the crossover rate is 8%,Project A will have the higher NPV.

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A) $35.63
B) $42.42
C) $40.30
D) $50.06
E) $52.18

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B

A) If a project with normal cash flows has an IRR greater than the WACC,the project must also have a positive NPV.
B) If Project A's IRR exceeds Project B's,then A must have the higher NPV.
C) A project's MIRR can never exceed its IRR.
D) If a project with normal cash flows has an IRR less than the WACC,the project must have a positive NPV.
E) If the NPV is negative,the IRR must also be negative.

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A

A) 5.01%
B) 5.50%
C) 5.99%
D) 6.67%
E) 6.18%

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A) If the WACC is 10%,both projects will have positive NPVs.
B) If the WACC is 6%,Project S will have the higher NPV.
C) If the WACC is 13%,Project S will have the lower NPV.
D) If the WACC is 10%,both projects will have a negative NPV.
E) Project S's NPV is more sensitive to changes in WACC than Project L's.

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A) 2.50 years
B) 1.90 years
C) 2.63 years
D) 1.93 years
E) 2.40 years

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A) A project's regular IRR is found by compounding the cash inflows at the WACC to find the terminal value (TV) ,then discounting this TV at the WACC.
B) A project's regular IRR is found by discounting the cash inflows at the WACC to find the present value (PV) ,then compounding this PV to find the IRR.
C) If a project's IRR is greater than the WACC,then its NPV must be negative.
D) To find a project's IRR,we must solve for the discount rate that causes the PV of the inflows to equal the PV of the project's costs.
E) To find a project's IRR,we must find a discount rate that is equal to the WACC.

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A) You should reject both projects because they will both have negative NPVs under the new conditions.
B) You should delay a decision until you have more information on the projects,even if this means that a competitor might come in and capture this market.
C) You should recommend Project L,because at the new WACC it will have the higher NPV.
D) You should recommend Project S,because at the new WACC it will have the higher NPV.
E) You should recommend Project L because it will have the higher IRR at the new WACC.

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A) The NPV,IRR,MIRR,and discounted payback (using a payback requirement of 3 years or less) methods always lead to the same accept/reject decisions for independent projects.
B) For mutually exclusive projects with normal cash flows,the NPV and MIRR methods can never conflict,but their results could conflict with the discounted payback and the regular IRR methods.
C) Multiple IRRs can exist,but not multiple MIRRs.This is one reason some people favor the MIRR over the regular IRR.
D) If a firm uses the discounted payback method with a required payback of 4 years,then it will accept more projects than if it used a regular payback of 4 years.
E) The percentage difference between the MIRR and the IRR is equal to the project's WACC.

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A) ​More of Project A's cash flows occur in the later years.
B) ​More of Project B's cash flows occur in the later years.
C) ​We must have information on the cost of capital in order to determine which project has the larger early cash flows.
D) ​The NPV profile graph is inconsistent with the statement made in the problem.
E) The crossover rate,i.e. ,the rate at which Projects A and B have the same NPV,is greater than either project's IRR.

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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.

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A) $92.69
B) $62.57
C) $0.00
D) $95.01
E) $78.79

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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 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) Since cash flows under the IRR and MIRR are both discounted at the same rate (the WACC) ,these two methods always rank mutually exclusive projects in the same order.

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