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

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

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A) 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.
B) You should recommend Project R,because at the new cost of capital it will have the higher NPV.
C) You should recommend Project K,because at the new cost of capital it will have the higher NPV.
D) You should recommend Project R because it will have both a higher IRR and a higher NPV under the new conditions.
E) You should reject both projects because they will both have negative NPVs under the new conditions.

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A) If Project S has a positive NPV,Project L must also have a positive NPV.
B) If the cost of capital falls,each project's IRR will increase.
C) If the cost of capital increases,each project's IRR will decrease.
D) If Projects S and L have the same NPV at the current cost of capital,10%,then Project L,the one with the lower IRR,would have a higher NPV if the cost of capital used to evaluate the projects declined.
E) Project S must have a higher NPV than Project L.

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

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A) A project's regular IRR is found by compounding the cash inflows at the cost of capital to find the present value (PV) ,then discounting the TV to find the IRR.
B) If a project's IRR is smaller than the cost of capital,then its NPV will be positive.
C) A project's IRR is the discount rate that causes the PV of the inflows to equal the project's cost.
D) If a project's IRR is positive,then its NPV must also be positive.
E) A project's regular IRR is found by compounding the initial cost at the cost of capital to find the terminal value (TV) ,then discounting the TV at the cost of capital.

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

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A) The crossover rate must be greater than 10%.
B) If the cost of capital is 8%,Project X will have the higher NPV.
C) If the cost of capital is 18%,Project Y will have the higher NPV.
D) Project X is larger in the sense that it has the higher initial cost.
E) The crossover rate must be less than 10%.

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A) 2.03 years
B) 2.25 years
C) 2.50 years
D) 2.75 years
E) 3.03 years

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A) If two projects are mutually exclusive,then they are likely to have multiple IRRs.
B) If a project is independent,then it cannot have multiple IRRs.
C) Multiple IRRs can occur only if the signs of the cash flows change more than once.
D) 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.
E) For a project to have more than one IRR,then both IRRs must be greater than the cost of capital.

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

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A) The payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects.
B) The discounted payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects.
C) The net present value method (NPV) is generally regarded by academics as being the best single method for evaluating capital budgeting projects.
D) The modified internal rate of return method (MIRR) is generally regarded by academics as being the best single method for evaluating capital budgeting projects.
E) The internal rate of return method (IRR) is generally regarded by academics as being the best single method for evaluating capital budgeting projects.

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A) If a project has "normal" cash flows,then its MIRR must be positive.
B) If a project has "normal" cash flows,then it will have exactly two real IRRs.
C) The definition of "normal" cash flows is that the cash flow stream has one or more negative cash flows followed by a stream of positive cash flows and then one negative cash flow at the end of the project's life.
D) If a project has "normal" cash flows,then it can have only one real IRR,whereas a project with "nonnormal" cash flows might have more than one real IRR.
E) If a project has "normal" cash flows,then its IRR must be positive.

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A) The lower the cost of capital used to calculate a project's NPV,the lower the calculated NPV will be.
B) If a project's NPV is less than zero,then its IRR must be less than the cost of capital.
C) If a project's NPV is greater than zero,then its IRR must be less than zero.
D) The NPV of a relatively low-risk project should be found using a relatively high cost of capital.
E) 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 cost of capital.

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