Question 1

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

Accepted Answer

The answer of Humboldt Inc. is considering a project that...

Question 2

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%

Accepted Answer

We can calculate the IRR using financial calculator or Excel. Using Excel's IRR function with the provided cash flows, we get an IRR of approximately 16.65%. This is a positive return, so the project should be accepted.

Question 3

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. 
A) $54.62
B) $57.49
C) $60.52
D) $63.54

Accepted Answer

To calculate the project's NPV, we need to discount each cash flow by the company's weighted average cost of capital (WACC), which is 10%.

The formula for NPV is:

NPV = CF1 / (1+WACC)^1 + CF2 / (1+WACC)^2 + ... + CFn / (1+WACC)^n

Where CF represents the cash flow for each year and n represents the number of years.

Using the formula for this project, we get:

NPV = -$200,000 / (1+0.10)^1 + $70,000 / (1+0.10)^2 + $80,000 / (1+0.10)^3 + $90,000 / (1+0.10)^4 + $100,000 / (1+0.10)^5

NPV = -$200,000 / 1.10 + $70,000 / 1.21 + $80,000 / 1.331 + $90,000 / 1.4641 + $100,000 / 1.61051

NPV = -$181,818.18 + $57,851.24 + $60,111.81 + $61,471.35 + $62,528.94

NPV = $60,144.16

Therefore, the project's NPV is $60,144.16, which is positive and indicates that the project should be accepted.

The correct answer is C.

Question 4

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. 
A) 18.72%
B) 19.65%
C) 20.64%
D) 21.67%

Accepted Answer

The answer of Frye Foods is considering a project that...

Question 5

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. 
A) $211.29
B) $234.77
C) $260.85
D) $289.84

Accepted Answer

The answer of Rappaport Enterprises is considering a project that...

Question 6

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) 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.
D) 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.

Accepted Answer

The textbook procedure for calculating MIRR involves compounding cash inflows at the WACC and then finding the discount rate that equates the present value of the terminal value to the initial cost.

Question 7

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. 
A) $142.37
B) $149.49
C) $156.97
D) $164.82

Accepted Answer

The answer of Adler Enterprises is considering a project that...

Question 8

Van Auken Inc. is considering a project that has the following cash flows:  The company's WACC is 10%. What are the project's payback, IRR, and NPV?
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

Accepted Answer

To calculate payback, we need to find the year in which the cumulative cash flows equal the initial investment. Using this method, we see that the payback period for this project is 2.6 years.

To calculate the IRR, we need to find the discount rate that makes the NPV of the project equal to zero. Using this method, we find that the IRR for this project is 21.22%.

To calculate the NPV, we need to discount the cash flows at the company's WACC and subtract the initial investment. Using this method, we find that the NPV for this project is $260.

The best answer is D because it is the only one that has all three calculations correct.

Question 9

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. 
A) $253.81
B) $282.01
C) $310.21
D) $341.23

Accepted Answer

To calculate the NPV of the project, we need to discount each cash flow by the WACC and sum them up. 
NPV = -7500 + (1875/1.1) + (1875/1.1)^2 + (1875/1.1)^3 + (1875/1.1)^4
NPV = $282.01
Since the NPV is positive, we should accept the project. Therefore, the best choice is B.

Question 10

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.

Accepted Answer

The crossover rate is the discount rate at which the NPV profiles of the two projects intersect. In this case, if the crossover rate is 8%, then Project B will have a higher NPV, as it has a higher IRR than Project A. Therefore, the best choice is C. Option A is incorrect as projects with IRRs higher than the WACC have positive NPVs. Option B is incorrect as the selection of the project depends on the available funds, risk preferences, and the impact of the project on the strategic goals of the firm. Option D is incorrect as we already know that Project B has a higher IRR and assuming no other factors, Project B would have a higher NPV at a crossover rate of 8%.

Question 11

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.

Accepted Answer

When a project's IRR is equal to its WACC, it means that the project is earning exactly what it should be earning based on its risk. Thus, the project's NPV should be zero, as the cash inflows would be equal to the initial investment. If the NPV was negative, it would mean that the project is not generating enough cash inflows to cover the costs and compensate investors for the risk they are taking on. Similarly, if the IRR was negative, it would mean that the project is not generating a sufficient return to compensate investors for the risk they are taking on. Therefore, option C is the correct answer.

Question 12

Projects A and B are mutually exclusive and have normal cash flows. Project A has an IRR of 15% and Project B's IRR is 20%. The company's WACC is 12%, and at that rate Project A has the higher NPV. Which of the following statements is correct?
A) The crossover rate for the two projects must be less than 12%.
B) Assuming the timing pattern of the two projects' cash flows is the same, Project B probably has a higher cost (and larger scale).
C) Assuming the two projects have the same scale, Project B probably has a faster payback than Project A.
D) Since B has the higher IRR, then it must also have the higher NPV if the crossover rate is less than the WACC of 12%.

Accepted Answer

The answer of Projects A and B are mutually exclusive...

Question 13

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. 
A) $243.43
B) $255.60
C) $268.38
D) $281.80

Accepted Answer

The answer of Edmondson Electric Systems is considering a project...

Question 14

Wells Inc. is considering a project that has the following cash flow data. What is the project's payback? 
A) 1.62 years
B) 1.80 years
C) 2.00 years
D) 2.20 years

Accepted Answer

The answer of Wells Inc. is considering a project that...

Question 15

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.

Accepted Answer

Based on the given information, the NPV is positive and the MIRR exceeds the WACC, which indicates that the project will add value to the company. While the project does have two IRRs, the MIRR is a better measure in this case as it considers reinvestment rate assumptions. It is important to explain this to the president and emphasize the positive impact on the company's value. Rejecting the project based solely on the IRR being less than the WACC may not be the best decision as it does not consider the project's positive NPV.

Question 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) 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.

Accepted Answer

The Modified Internal Rate of Return (MIRR) accounts for the cost of capital and reinvestment rate, often resulting in a value less than the IRR when the IRR is greater than the WACC.

Question 17

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. 
A) $98.78
B) $103.98
C) $109.45
D) $114.93

Accepted Answer

To calculate the NPV, we need to discount each cash flow using the given WACC of 10%.

Year 0: -$500
Year 1: $150/(1+0.10) = $136.36
Year 2: $250/(1+0.10)^2 = $206.61
Year 3: $300/(1+0.10)^3 = $249.26
Year 4: $400/(1+0.10)^4 = $298.05

NPV = -$500 + $136.36 + $206.61 + $249.26 + $298.05 = $109.45

Therefore, the best choice is C, as the project has a positive NPV.

Question 18

A company is choosing between two projects. The larger project has an initial cost of $100,000, annual cash flows of $30,000 for 5 years, and an IRR of 15.24%. The smaller project has an initial cost of $50,000, annual cash flows of $16,000 for 5 years, and an IRR of 16.63%. The projects are equally risky. Which of the following statements is correct?
A) Since the smaller project has the higher IRR, the two projects' NPV profiles cannot cross, and the smaller project's NPV will be higher at all positive values of WACC.
B) Since the smaller project has the higher IRR, the two projects' NPV profiles will cross, and the larger project will look better based on the NPV at all positive values of WACC.
C) Since the smaller project has the higher IRR but the larger project has the higher NPV at a zero discount rate, the two projects' NPV profiles will cross, and the larger project will have the higher NPV if the WACC is less than the crossover rate.
D) Since the smaller project has the higher IRR and the larger NPV at a zero discount rate, the two projects' NPV profiles will cross, and the larger smaller project will look better if the WACC is less than the crossover rate.

Accepted Answer

The IRR method assumes that cash flows can be reinvested at the IRR, while the NPV method uses a discount rate to calculate the present value of future cash flows. In this case, the smaller project has a higher IRR but a lower NPV at a zero discount rate. Therefore, the two projects' NPV profiles will cross, and the larger project will have a higher NPV if the WACC is less than the crossover rate.

Question 19

Choi 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) 13.89%
B) 15.43%
C) 17.15%
D) 19.05%

Accepted Answer

The answer of Choi Computer Systems is considering a project...

Question 20

Levin Company 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) 15.94%
B) 17.71%
C) 19.68%
D) 21.86%

Accepted Answer

The answer of Levin Company is considering a project that...

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

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.

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.

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.

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.

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.

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.

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.

Van Auken Inc. is considering a project that has the following cash flows: The company's WACC is 10%. What are the project's payback, IRR, and NPV?

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.

Which of the following statements is correct? Assume that all projects being considered have normal cash flows and are equally risky.

Projects A and B are mutually exclusive and have normal cash flows. Project A has an IRR of 15% and Project B's IRR is 20%. The company's WACC is 12%, and at that rate Project A has the higher NPV. Which of the following statements is correct?

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.

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

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.

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.

Choi 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.

Levin Company 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.