Assignment Chapter 11

Assignment Chapter 11

True/False
Indicate whether the statement is true or false.

____ 1. 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.
____ 2. The internal rate of return is that discount rate that equates the present value of the cash outflows (or
costs) with the present value of the cash inflows.
____ 3. Other things held constant, an increase in the cost of capital will result in a decrease in a project's IRR.
____ 4. If a project's NPV exceeds its IRR, then the project should be accepted.
____ 5. Conflicts between two mutually exclusive projects, where the NPV method chooses one project but the
IRR method chooses the other, should generally be resolved in favor of the project with the higher NPV.
____ 6. The NPV method's assumption that cash inflows are reinvested at the cost of capital is 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.
____ 7. One advantage of the payback method for evaluating potential investments is that it provides some
information about a project's liquidity and risk.
____ 8. In theory, any capital budgeting investment rule should depend solely on forecasted cash flows and the
opportunity cost of capital. The rule itself should not be affected by managers' tastes, the choice of
accounting method, or the profitability of other independent projects.
____ 9. When considering two mutually exclusive projects, the firm should always select that project whose
internal rate of return is the highest provided the projects have the same initial cost. This statement is true
regardless of whether the projects can be repeated or not.
____ 10. The primary reason that the NPV method is conceptually superior to the IRR method for evaluating
mutually exclusive investments is that multiple IRRs may exist.
____ 11. The NPV and IRR methods, when used to evaluate independent and equally risky projects, will lead to
different accept/reject decisions if their IRRs are greater than the cost of capital.
____ 12. A decrease in the firm's discount rate (r, or WACC) will increase projects' NPVs, which could change the
accept/reject decision for any potential project. However, such a change would have no impact on the
project's IRR; therefore, the accept/reject decision under the IRR method is independent of the cost of
capital.
____ 13. 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. Other things held
constant, this change will cause L to become preferred to S.
Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 14. 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 regular IRR is found by compounding the initial cost at the WACC to find the
terminal value (TV), then discounting the TV at the WACC.
b. A project's regular IRR is found by compounding the cash inflows at the WACC to find
the present value (PV), then discounting to find the IRR.
c. If a project's IRR is smaller than the WACC, then its NPV will be positive.
d. A project's IRR is the discount rate that causes the PV of the inflows to equal the project's
cost.
e. If a project's IRR is positive, then its NPV must also be positive.
____ 15. 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 generally found by compounding the cash inflows at the WACC to find
the terminal value (TV), then discounting the TV at the IRR to find its PV.
b. The higher the WACC used to calculate the NPV, the lower the calculated NPV will be.
c. If a project's NPV is greater 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 NPVs of relatively risky projects should be found using relatively low WACCs.
____ 16. 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. If Project A has a higher IRR than Project B, then Project A must have the lower NPV.
b. If Project A has a higher IRR than Project B, then Project A must also have a higher NPV.
c. The IRR calculation implicitly assumes that all cash flows are reinvested at the WACC.
d. The IRR calculation implicitly assumes that cash flows are withdrawn from the business
rather than being reinvested in the business.
e. If a project has normal cash flows and its IRR exceeds its WACC, then the project's NPV
must be positive.
____ 17. Which of the following statements is CORRECT?
a. If a project with normal cash flows has an IRR greater than the WACC, the project must
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.
____ 18. Which of the following statements is CORRECT?
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. The MIRR method assumes that cash flows are reinvested at the crossover rate.
____ 19. Which of the following statements is CORRECT?
a. For independent projects, 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
a given project.
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 as its cutoff criterion a regular payback of 4 years.
e. The percentage difference between the MIRR and the IRR is equal to the project's WACC.
____ 20. Which of the following statements is CORRECT?
a. For a project with normal cash flows, any change in the WACC will change both the NPV
and the IRR.
b. To find the MIRR, we first compound cash flows at the regular IRR to find the TV, and
then we discount the TV at the WACC to find the PV.
c. The NPV and IRR methods both assume cash flows can be reinvested at the WACC.
However, the MIRR method assumes reinvestment at the MIRR itself.
d. If two projects have the same cost, and if their NPV profiles cross in the upper right
quadrant, then the project with the higher IRR probably has more of its cash flows coming
in the later years.
e. If two projects have the same cost, and if their NPV profiles cross in the upper right
quadrant, then the project with the lower IRR probably has more of its cash flows coming
in the later years.
____ 21. Which of the following statements is CORRECT?
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. 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.
____ 22. McCall Manufacturing has a WACC of 10%. The firm is considering two normal, equally risky, mutually
exclusive, but not repeatable projects. The two projects have the same investment costs, but Project A has
an IRR of 15%, while Project B has an IRR of 20%. Which of the following statements is CORRECT?
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 a higher NPV than Project B.
____ 23. 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 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. To find a project's MIRR, we compound cash inflows at the IRR and then discount the
terminal value back to t = 0 at the WACC.
____ 24. 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.
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 its MIRR will be greater than the IRR.
d. 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.
e. To find a project's MIRR, the textbook procedure compounds cash inflows at the WACC
and then finds the discount rate that causes the PV of the terminal value to equal the initial
cost.
____ 25. Edmondson Electric Systems is considering a project that has the following cash flow and WACC data.
What is the project's NPV? Note that if a project's projected NPV is negative, it should be rejected.

WACC: 10.00%
Year: 0 1 2 3
Cash flows: $1,000 $500 $500 $500

a. $243.43
b. $255.60
c. $268.38
d. $281.80
e. $295.89
____ 26. Johnson Enterprises is considering a project that has the following cash flow and WACC data. What is
the project's NPV? Note that if a project's projected NPV is negative, it should be rejected.

WACC: 10.00%
Year: 0 1 2 3 4
Cash flows: $1,000 $350 $350 $350 $350

a. $98.78
b. $103.98
c. $109.45
d. $114.93
e. $120.67
____ 27. Humboldt Inc. is considering a project that has the following cash flow and WACC data. What is the
project's NPV? Note that if a project's projected NPV is negative, it should be rejected.

WACC: 9.00%
Year: 0 1 2 3 4 5
Cash flows: $1,000 $300 $300 $300 $300 $300

a. $135.94
b. $143.09
c. $150.62
d. $158.55
e. $166.90
____ 28. Tucker Corp. 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 negative, in which case it will be rejected.

Year: 0 1 2 3
Cash flows: $1,000 $450 $450 $450

a. 15.82%
b. 16.65%
c. 17.48%
d. 18.36%
e. 19.27%
____ 29. Frye Foods 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 negative, in which case it will be rejected.

Year: 0 1 2 3 4 5
Cash flows: $1,000 $325 $325 $325 $325 $325

a. 18.72%
b. 19.65%
c. 20.64%
d. 21.67%
e. 22.75%
____ 30. Van Auken Inc. is considering a project that has the following cash flows:

Year Cash Flow

0 $1,000
1 400
2 300
3 500
4 400

The company's WACC is 10%. What are the project's payback, internal rate of return, and net present
value?
a. Payback = 2.4; IRR = 10.00%; NPV = $600.
b. Payback = 2.4; IRR = 21.22%; NPV = $260.
c. Payback = 2.6; IRR = 21.22%; NPV = $300.
d. Payback = 2.6; IRR = 21.22%; NPV = $260.
e. Payback = 2.6; IRR = 24.12%; NPV = $300.
____ 31. Adler Enterprises is considering a project that has the following cash flow and WACC data. What is the
project's NPV? Note that a project's projected NPV can be negative, in which case it will be rejected.

WACC: 10.00%
Year: 0 1 2 3
Cash flows: $1,000 $450 $460 $470

a. $142.37
b. $149.49
c. $156.97
d. $164.82
e. $173.06
____ 32. Babcock Inc. is considering a project that has the following cash flow and WACC data. What is the
project's NPV? Note that a project's projected NPV can be negative, in which case it will be rejected.

WACC: 10.00%
Year: 0 1 2 3
Cash flows: $950 $500 $400 $300

a. $54.62
b. $57.49
c. $60.52
d. $63.54
e. $66.72
____ 33. Rappaport Enterprises is considering a project that has the following cash flow and WACC data. What is
the project's NPV? Note that a project's projected NPV can be negative, in which case it will be rejected.

WACC: 10.00%
Year: 0 1 2 3 4
Cash flows: $1,000 $400 $405 $410 $415

a. $190.16
b. $211.29
c. $234.77
d. $260.85
e. $289.84
____ 34. Barry Company is considering a project that has the following cash flow and WACC data. What is the
project's NPV? Note that a project's projected NPV can be negative, in which case it will be rejected.

WACC: 10.00%
Year: 0 1 2 3 4 5
Cash flows: $1,200 $400 $395 $390 $385 $380

a. $253.81
b. $282.01
c. $310.21
d. $341.23
e. $375.35
____ 35. Thompson Stores 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.

Year: 0 1 2 3 4 5
Cash flows: $1,000 $300 $295 $290 $285 $270

a. 11.16%
b. 12.40%
c. 13.78%
d. 15.16%
e. 16.68%
____ 36. Edelman Electric Systems 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.

WACC: 10.00%
Year: 0 1 2 3
Cash flows: $800 $350 $350 $350

a. 8.62%
b. 9.58%
c. 10.64%
d. 11.82%
e. 13.14%
____ 37. Hindelang 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.

WACC: 10.00%
Year: 0 1 2 3 4
Cash flows: $900 $300 $320 $340 $360

a. 12.61%
b. 14.01%
c. 15.41%
d. 16.95%
e. 18.64%
____ 38. Stewart Associates is considering a project that has the following cash flow data. What is the project's
payback?

Year: 0 1 2 3 4 5
Cash flows: $1,000 $300 $310 $320 $330 $340

a. 2.11 years
b. 2.34 years
c. 2.60 years
d. 2.89 years
e. 3.21 years
____ 39. 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: 0 1 2 3
Cash flows: $1,000 $500 $500 $500

a. 2.12 years
b. 2.35 years
c. 2.59 years
d. 2.85 years
e. 3.13 years
____ 40. 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: 0 1 2 3 4
Cash flows: $1,000 $525 $485 $445 $405

a. 1.72 years
b. 1.92 years
c. 2.13 years
d. 2.36 years
e. 2.60 years
____ 41. Last month, Smith Systems Inc. decided to accept the project whose cash flows are shown below.
However, before actually starting the project, the Federal Reserve took actions that lowered interest rates
and therefore Smith's WACC. By how much did the change in the WACC affect the project's forecasted
NPV? Assume that the Fed action does not affect the cash flows, and note that a project's projected NPV
can be negative, in which case it should be rejected.

New WACC: 8.00% Old WACC: 11.00%

Year: 0 1 2 3
Cash flows: $1,000 $500 $500 $500

a. $57.18
b. $60.19
c. $63.36
d. $66.69
e. $70.03
____ 42. The Federal Reserve recently shifted its monetary policy, causing Lasik Vision's WACC to change. Lasik
had recently analyzed the project whose cash flows are shown below. However, the CFO wants to
reconsider this and all other proposed projects in view of the Fed action. How much did the changed
WACC cause the forecasted NPV to change? Assume that the Fed action does not affect the cash flows,
and note that a project's projected NPV can be negative, in which case it should be rejected.

New WACC: 7.00% Old WACC: 10.00%

Year: 0 1 2 3
Cash flows: $1,000 $500 $520 $540

a. $72.27
b. $75.88
c. $79.68
d. $83.66
e. $87.85
____ 43. Sorenson Stores is considering a project that has the following cash flows:

Year Cash Flow

0 CF0 = ?
1 $2,000
2 3,000
3 3,000
4 1,500

The project has a payback of 2.5 years, and the firm's cost of capital is 12%. What is the project's NPV?
a. $577.68
b. $765.91
c. $1,049.80
d. $2,761.32
e. $3,765.91