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Financing pressure or liquidity can explains the popular use of payback period in project appraisals for small firms.

A) True
B) False

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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. 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. A) $135.94 B) $143.09 C) $150.62 D) $166.90


A) $135.94
B) $143.09
C) $150.62
D) $166.90

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

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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. 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. A) 15.82% B) 16.65% C) 17.48% D) 18.36%


A) 15.82%
B) 16.65%
C) 17.48%
D) 18.36%

E) All of the above
F) None of the above

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Which of the following statements is correct?


A) For independent projects, the NPV, IRR, MIRR, and discounted payback (using a payback requirement of three 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 favour the MIRR over the regular IRR.
D) If a firm uses the discounted payback method with a required payback of four years, then it will accept more projects than if it used as its cutoff criterion a regular payback of four years.

E) A) and D)
F) All of the above

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Steve Hawke is a football star who has been offered contracts by two different teams. The payments (in millions of dollars) under the two contracts are shown below: Steve Hawke is a football star who has been offered contracts by two different teams. The payments (in millions of dollars) under the two contracts are shown below: Steve plans to accept the contract that provides him with the highest NPV. At what discount rate would he be indifferent between the two contracts? A) 10.85% B) 11.35% C) 12.66% D) 13.98% Steve plans to accept the contract that provides him with the highest NPV. At what discount rate would he be indifferent between the two contracts?


A) 10.85%
B) 11.35%
C) 12.66%
D) 13.98%

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

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The MIRR method has wide appeal for professors, but most business executives prefer the NPV method to either the regular or MIRR.

A) True
B) False

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

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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) If the crossover rate is 8%, Project A will have a higher NPV than Project B.

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

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ZumBahlen Inc. is considering the following mutually exclusive projects: ZumBahlen Inc. is considering the following mutually exclusive projects: At what cost of capital will the NPV of the two projects be the same? (That is, what is the crossover rate?) A) 16.15% B) 16.74% C) 17.33% D) 17.80% At what cost of capital will the NPV of the two projects be the same? (That is, what is the "crossover" rate?)


A) 16.15%
B) 16.74%
C) 17.33%
D) 17.80%

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

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The Bank of Canada 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 Bank of Canada's action. How much did the changed WACC cause the forecasted NPV to change? Assume that the Bank of Canada's 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. The Bank of Canada 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 Bank of Canada's action. How much did the changed WACC cause the forecasted NPV to change? Assume that the Bank of Canada's 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. A) $72.27 B) $75.88 C) $79.68 D) $83.66


A) $72.27
B) $75.88
C) $79.68
D) $83.66

E) B) and C)
F) A) and D)

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Project X's IRR is 19% and Project Y's IRR is 17%. The projects have the same risk and the same lives, and each has constant cash flows during each year of their lives. If the WACC is 10%, Project Y has a higher NPV than X. Given this information, which of the following statements is correct?


A) The crossover rate between the two projects must be less than 10%.
B) The crossover rate between the two projects must be greater than 10%.
C) If the WACC is 8%, Project X will have the higher NPV.
D) If the WACC is 18%, Project Y will have the higher NPV.

E) All of the above
F) A) and B)

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When considering two mutually exclusive projects, the firm should always select that project whose IRR 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.

A) True
B) False

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


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

E) All of the above
F) A) and B)

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The regular payback method has a number of disadvantages, some of which are listed below. Which of these items is NOT a disadvantage of this method?


A) lack of an objective, market-determined benchmark for making decisions
B) ignores cash flows beyond the payback period
C) does not directly account for the time value of money
D) does not provide any indication regarding a project's liquidity

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

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A small manufacturer is considering two alternative machines. Machine A costs $1.0 million, has an expected life of 5 years, and generates after-tax cash flows of $350,000 per year. At the end of 5 years, the salvage value of the machine is zero, but the company will be able to purchase another Machine A at a cost of $1.2 million. The second Machine A will generate after-tax cash flows of $375,000 a year for another 5 years, at which time its salvage value will again be zero. Alternatively, the company can buy Machine B at a cost of $1.5 million today. Machine B will produce after-tax cash flows of $400,000 a year for 10 years, after which it will have an after-tax salvage value of $100,000. Assume that the cost of capital is 12%. Based on the equivalent annual annuity, if the company chooses the machine that adds the most value to the firm, by how much will the company's value increase per year?


A) $792,286.54
B) $347,802.00
C) $140,227.71
D) $61,557.88

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

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Walker & Campsey wants to invest in a new computer system, and management has narrowed the choice to Systems A and B. System A requires an up-front cost of $100,000, after which it generates positive after-tax cash flows of $60,000 at the end of each of the next two years. System B also requires an up-front cost of $100,000, after which it generates positive after-tax cash flows of $48,000 at the end of each of the next three years. The company's cost of capital is 11%. Based on the equivalent annual annuity, which system will be chosen?


A) A,$1,622.88
B) B,$1,622.88
C) A,$7,083.47
D) B,$7,083.47

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

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You are on the staff of Camden Inc. The CFO believes project acceptance should be based on the NPV, but Steve Camden, the president, insists that no project can be accepted unless its IRR exceeds the project's risk-adjusted WACC. Now you must make a recommendation on a project that has a cost of $15,000 and two cash flows: $110,000 at the end of Year 1 and -$100,000 at the end of Year 2. The president and the CFO both agree that the appropriate WACC for this project is 10%. At 10%, the NPV is $2,355.37, but you find two IRRs, one at 6.33% and one at 5.27%, and a MIRR of 11.32%. Which of the following statements best describes your optimal recommendation, i.e., the analysis and recommendation that is best for the company and least likely to get you in trouble with either the CFO or the president?


A) You should recommend that the project be rejected because its NPV is negative and its IRR is less than the WACC.
B) You should recommend that the project be rejected because, although its NPV is positive, it has an IRR that is less than the WACC.
C) You should recommend that the project be accepted because (1) its NPV is positive and (2) although it has two IRRs, in this case it would be better to focus on the MIRR, which exceeds the WACC. You should explain this to the president and tell him that that the firm's value will increase if the project is accepted.
D) You should recommend that the project be rejected because (1) its NPV is positive and (2) it has two IRRs, one of which is less than the WACC, which indicates that the firm's value will decline if the project is accepted.

E) B) and D)
F) None of the above

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When evaluating mutually exclusive projects, the MIRR always leads to the same capital budgeting decisions as the NPV method, regardless of the relative lives or sizes of the projects being evaluated.

A) True
B) False

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Aubey Inc. is considering two projects that have the following cash flows: Aubey Inc. is considering two projects that have the following cash flows: At what cost of capital would the two projects have the same NPV? A) 4.73% B) 5.85% C) 6.70% D) 7.50% At what cost of capital would the two projects have the same NPV?


A) 4.73%
B) 5.85%
C) 6.70%
D) 7.50%

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

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Which of the following statements is correct?


A) The IRR is generally regarded by academics as being the best single method for evaluating capital budgeting projects.
B) The payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects.
C) The discounted payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects.
D) The NPV is generally regarded by academics as being the best single method for evaluating capital budgeting projects.

E) A) and B)
F) All of the above

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