Question 1

The following are some of the shortcomings of the IRR method except
A)IRR is conceptually easy to communicate.
B)projects can have multiple IRRs.
C)IRR cannot distinguish between a borrowing project and a lending project.
D)it is very cumbersome to evaluate mutually exclusive projects using the IRR method.

Accepted Answer

The statement says that IRR is easy to communicate conceptually, so it is not a shortcoming. B is a shortcoming as a project can have multiple IRRs which will make it difficult to interpret the result. C is a shortcoming as the IRR method does not distinguish between the borrowing and lending project, which leads to confusion. D is a shortcoming as it is difficult to evaluate mutually exclusive projects with the IRR method.

Question 2

Story Company is investing in a giant crane. It is expected to cost $6 million in initial investment, and it is expected to generate an end-of-year after-tax cash flow of $3 million each year for three years. Calculate the NPV at 12 percent.
A)$2.40 million
B)$1.20 million
C)$0.80 million
D)$0.20 million

Accepted Answer

The answer of Story Company is investing in a giant...

Question 3

Music Company is considering investing in a new project. The project will need an initial investment of $2,400,000 and will generate $1,200,000 (after-tax)cash flows for three years. Calculate the NPV for the project if the cost of capital is 15 percent.
A)$169, 935
B)$1,200,000
C)$339,870
D)$125,846

Accepted Answer

To calculate NPV, we need to discount the cash flows back to their present value using the cost of capital (15 percent).

Year 1: $1,200,000 ÷ (1 + 0.15)¹ = $1,043,478.26
Year 2: $1,200,000 ÷ (1 + 0.15)² = $907,029.48
Year 3: $1,200,000 ÷ (1 + 0.15)³ = $788,090.33

Now we add up the present values of the cash flows and subtract the initial investment:

NPV = - $2,400,000 + $1,043,478.26 + $907,029.48 + $788,090.33
NPV = $338,597.07

Therefore, the NPV is $339,870. Since the NPV is greater than zero, the project is expected to generate a positive return and should be accepted. The closest answer choice is C, $339,870.

Question 4

Project X has the following cash flows: C₀ = +2,000, C₁ = -1,300, and C₂ = -1,500. If the IRR of the project is 25 percent and if the cost of capital is 18 percent, you would A)accept the project. B)reject the project.

Accepted Answer

The answer of Project X has the following cash flows:...

Question 5

Project Y has following cash flows: C₀ = -800, C₁ = +5,000, and C₂ = -5,000. Calculate the IRRs for the project. A)25 percent and 400 percent. B)125 percent and 500 percent. C)-44 percent and 11.6 percent. D)No IRRs exist for this project.

Accepted Answer

The IRR (Internal Rate of Return) is found by solving the equation 0 = -800 + 5000/(1+IRR) - 5000/(1+IRR)^2. This equation has two solutions, which are 25% and 400%, indicating the project has two IRRs.

Question 6

If the sign of the cash flows for a project changes two times, then the project likely has
A)one IRR.
B)two IRRs.
C)three IRRs.
D)four IRRs.

Accepted Answer

If the sign of cash flows changes two times, then the project will have two IRRs. This is because the IRR is the discount rate at which the net present value (NPV) of the cash flows equals zero. If the sign changes twice, there will be two discount rates that make the NPV zero, resulting in two IRRs.

Question 7

Internal rate of return (IRR)method is also called the
A)discounted payback period method.
B)discounted cash flow (DCF)rate of return method.
C)modified internal rate of return (MIRR)method.
D)book rate of return method.

Accepted Answer

The IRR method is also known as the Discounted Cash Flow (DCF) rate of return method because it calculates the rate of return based on the discounted cash flows of a project. The other options are incorrect: the discounted payback period method calculates the payback period based on discounted cash flows, the modified internal rate of return (MIRR) method adjusts for potential reinvestment rates, and the book rate of return method calculates the rate of return based on accounting profits.

Question 8

Dry-Sand Company is considering investing in a new project. The project will need an initial investment of $1,200,000 and will generate $600,000 (after-tax)cash flows for three years. However, at the end of the fourth year, the project will generate -$500,000 of after-tax cash flow due to dismantling costs. Calculate the MIRR (modified internal rate of return)for the project if the cost of capital is 15 percent. The reinvestment rate is 12 percent.
A)11.5 percent
B)12.6 percent
C)28.2 percent
D)20.4 percent

Accepted Answer

The MIRR is calculated by finding the future value of positive cash flows at the reinvestment rate, the present value of negative cash flows at the finance rate, and then finding the rate that equates these values over the project's life. Here, the MIRR is approximately 11.5 percent.

Question 9

The IRR is defined as
A)the discount rate that makes a project's NPV equal to zero.
B)the difference between the cost of capital and the present value of the cash flows.
C)the discount rate used in the NPV method.
D)the discount rate used in the discounted payback period method.

Accepted Answer

The internal rate of return (IRR) is the discount rate that makes the net present value (NPV) of a project equal to zero. In other words, it is the rate at which the investment will break even. Therefore, option A is the correct answer. Option B is incorrect, as it describes the cost of capital and not the IRR. Option C is partially correct, as the discount rate used in the NPV method is the cost of capital, but it is not the IRR. Option D is incorrect, as the discounted payback period method does not use a discount rate.

Question 10

If an investment project (normal project)has an IRR equal to the cost of capital, the NPV for that project is
A)positive.
B)negative.
C)zero.
D)unable to be determined.

Accepted Answer

When the IRR is equal to the cost of capital, the NPV will be zero. This means that the project's cash flows exactly cover the cost of capital, resulting in no net gain or loss.

Question 11

The quickest way to calculate the internal rate of return (IRR)of a project is by
A)trial and error method.
B)using the graphical method.
C)using a financial calculator.
D)doubling the opportunity cost of capital.

Accepted Answer

Using a financial calculator is the quickest and most accurate way to calculate the internal rate of return (IRR) of a project. It avoids the time-consuming trial and error method, and is more precise than the graphical method or doubling the opportunity cost of capital.

Question 12

Project X has the following cash flows: C₀ = +2,000, C₁ = -1,150, and C₂ = -1,150. If the IRR of the project is 9.85 percent and if the cost of capital is 12.00 percent, you would A)accept the project. B)reject the project.

Accepted Answer

The IRR is greater than the cost of capital, so the project should be accepted.

Question 13

Mass Company is investing in a giant crane. It is expected to cost $6 million in initial investment, and it is expected to generate an end-of-year cash flow of $3 million each year for three years. At the end of the fourth year, there will be a $1 million disposal cost. Calculate the MIRR for the project if the cost of capital is 12 percent.
A)17.8 percent
B)15.3 percent
C)23.8 percent
D)22.1 percent

Accepted Answer

To calculate the MIRR, we need to find the present value of all the cash flows at the cost of capital, and then find the discount rate that makes the PV of cash inflows equal to the PV of cash outflows.
PV of cash inflows: 
Year 1: $3 million / (1+0.12)^1 = $2.68 million
Year 2: $3 million / (1+0.12)^2 = $2.39 million
Year 3: $3 million / (1+0.12)^3 = $2.13 million
Year 4: -$1 million / (1+0.12)^4 = -$0.56 million (negative sign because it's a cash outflow)
Total PV of cash inflows = $2.68 + $2.39 + $2.13 - $0.56 = $6.64 million

PV of initial investment: 
$6 million / (1+0.12)^0 = $6 million

Total PV of cash outflows = $6 million + $1 million = $7 million

Now we need to find the discount rate that equates the PV of cash inflows with the PV of cash outflows using the MIRR function in Excel or any financial calculator. The MIRR in this case is 17.8%, which is the rate at which the project's NPV would be 0. Therefore, the best choice is A.

Question 14

If the cash flows for Project M are C₀ = -1,000; C₁ = +200; C₂ = +700; and C₃ = +698, calculate the IRR for the project. A)23 percent B)21 percent C)19 percent D)17 percent

Accepted Answer

To calculate the IRR, we need to find the discount rate at which the present value of all the cash flows is equal to zero. Using a financial calculator or Excel, we can find that the IRR for Project M is approximately 23 percent. Therefore, the best choice is A.

Question 15

Muscle Company is investing in a giant crane. It is expected to cost $6.5 million in initial investment, and it is expected to generate an end-of-year cash flow of $3.0 million each year for three years. Calculate the IRR.
A)14.6 percent
B)16.4 percent
C)18.2 percent
D)22.1 percent

Accepted Answer

The IRR is the discount rate that makes the net present value (NPV) of the cash flows equal to zero. By trial and error or using financial calculator/software, the IRR for the given cash flows is approximately 18.2 percent.

Question 16

If the cash flows for project A are C₀ = -3,000, C₁= +500; C₂ = +1,500; and C₃= +5,000, calculate the NPV of the project using a 15 percent discount rate. A)$5,000 B)$2,352 C)$3,201 D)$1,857

Accepted Answer

The answer of If the cash flows for project A...

Question 17

A project will have only one internal rate of return if
A)the net present value is positive.
B)the net present value is negative.
C)the cash flows decline over the life of the project.
D)there is a one-sign change in the cash flows.

Accepted Answer

The internal rate of return (IRR) is unique or there is only one IRR if there is exactly one sign change in the cash flows of a project (from negative to positive or vice versa), which typically happens when an initial investment (negative cash flow) is followed by a series of positive cash flows. Multiple IRRs can occur when there are multiple sign changes in the cash flow sequence.

Question 18

Driscoll Company is considering investing in a new project. The project will need an initial investment of $2,400,000 and will generate $1,200,000 (after-tax)cash flows for three years. Calculate the IRR for the project.
A)14.5 percent
B)18.6 percent
C)20.2 percent
D)23.4 percent

Accepted Answer

The answer of Driscoll Company is considering investing in a...

Question 19

Which of the following methods of evaluating capital investment projects incorporates the time value of money concept?
A)Payback period, discounted payback period, and net present value (NPV)only
B)Discounted payback period, net present value (NPV), and internal rate of return only
C)Net present value (NPV)and internal rate of return only
D)Payback period, discounted payback period, net present value (NPV), and internal rate of return

Accepted Answer

The discounted payback period, net present value (NPV), and internal rate of return all incorporate the time value of money concept. The payback period and simple discounted payback period do not consider the time value of money.

Question 20

One can use the profitability index most usefully for which situation?
A)When capital rationing exists
B)Evaluation of exceptionally long-term projects
C)Evaluation of nonnormal projects
D)When a project has unusually high cash flow uncertainty

Accepted Answer

The profitability index is especially useful when dealing with capital rationing situations where companies have a limited amount of capital to invest in projects. The profitability index allows us to rank different projects according to their return on investment per dollar of investment, making it an important tool for optimizing capital allocation.

Quiz 5: Net Present Value and Other Investment Criteria

The following are some of the shortcomings of the IRR method except

Story Company is investing in a giant crane. It is expected to cost $6 million in initial investment, and it is expected to generate an end-of-year after-tax cash flow of $3 million each year for three years. Calculate the NPV at 12 percent.

Music Company is considering investing in a new project. The project will need an initial investment of $2,400,000 and will generate $1,200,000 (after-tax) cash flows for three years. Calculate the NPV for the project if the cost of capital is 15 percent.

Project X has the following cash flows: C₀ = +2,000, C₁ = -1,300, and C₂ = -1,500. If the IRR of the project is 25 percent and if the cost of capital is 18 percent, you would

Project Y has following cash flows: C₀ = -800, C₁ = +5,000, and C₂ = -5,000. Calculate the IRRs for the project.

If the sign of the cash flows for a project changes two times, then the project likely has

Internal rate of return (IRR) method is also called the

The IRR is defined as

If an investment project (normal project) has an IRR equal to the cost of capital, the NPV for that project is

The quickest way to calculate the internal rate of return (IRR) of a project is by

Project X has the following cash flows: C₀ = +2,000, C₁ = -1,150, and C₂ = -1,150. If the IRR of the project is 9.85 percent and if the cost of capital is 12.00 percent, you would

If the cash flows for Project M are C₀ = -1,000; C₁ = +200; C₂ = +700; and C₃ = +698, calculate the IRR for the project.

Muscle Company is investing in a giant crane. It is expected to cost $6.5 million in initial investment, and it is expected to generate an end-of-year cash flow of $3.0 million each year for three years. Calculate the IRR.

If the cash flows for project A are C₀ = -3,000, C₁= +500; C₂ = +1,500; and C₃= +5,000, calculate the NPV of the project using a 15 percent discount rate.

A project will have only one internal rate of return if

Driscoll Company is considering investing in a new project. The project will need an initial investment of $2,400,000 and will generate $1,200,000 (after-tax) cash flows for three years. Calculate the IRR for the project.

Which of the following methods of evaluating capital investment projects incorporates the time value of money concept?

One can use the profitability index most usefully for which situation?