Q16 Q16 Q16

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.At the current required rate of return, normal Projects S and L have identical NPVs.Now suppose interest rates and money costs generally decline.Other things held constant, this change will cause L to become preferred to S.

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True False

Q20 Q20 Q20

The IRR of normal Project X is greater than the IRR of normal Project Y, and both IRRs are greater than zero.
Also, the NPV of X is greater than the NPV of Y at the required rate of return.If the two projects are mutually exclusive, Project X should definitely be selected, and the investment made, provided we have confidence in the data.Put another way, it is impossible to draw NPV profiles that would suggest not accepting Project X.

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Q22 Q22 Q22

Small businesses probably make less use of the DCF capital budgeting techniques than large businesses.This may reflect a lack of knowledge on the part of small firms' managers, but it may also reflect a rational conclusion that the costs of using DCF analysis outweigh the benefits of these methods for those firms.

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True False

Q33 Q33 Q33

Projects A and B have the same expected lives and initial cash outflows.However, one project's cash flows are larger in the early years, while the other project has larger cash flows in the later years.The two NPV profiles are given below: Which of the following statements is correct?

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Multiple Choice

Q42 Q42 Q42

Two mutually exclusive projects each have a cost of $10,000.The total, undiscounted cash flows from Project L are $15,000, while the undiscounted cash flows from Project S total $13,000.Their NPV profiles cross at a discount rate of 10 percent.Which of the following statements best describes this situation?

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Multiple Choice

Q45 Q45 Q45

Two firms evaluated the same capital budgeting project to determine whether to purchase it.The CFO of Anchor Weights Corporation (AWC) reported that she determined that the project's internal rate of return equals 9 percent, and she recommended that the project be purchased.The CFO of Sectional Spas Incorporated (SSI) simply reported that the project was unacceptable to his firm when he evaluated it using one of the capital budgeting techniques that considers the time value of money.Given this information, which of the following statements is correct?

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Multiple Choice

Q46 Q46 Q46

When Richard evaluated a capital budgeting project, a new machine needed to manufacture inventory using his firm's required rate of return, he discovered that the project's net present value (NPV) is negative.Based on this information, which of the following must be correct?

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Multiple Choice

Q48 Q48 Q48

Union Atlantic Corporation, which has a required rate of return equal to 14 percent, is evaluating a capital budgeting project that has the following characteristics: Union Atlantic's capital budgeting manager has determined that the project's net present value is $7,008.According to this information, which of the following statements is correct?

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Multiple Choice

Q57 Q57 Q57

Your assistant has just completed an analysis of two mutually exclusive projects.You must now take her report to a board of directors meeting and present the alternatives for the board's consideration.To help you with your presentation, your assistant also constructed a graph with NPV profiles for the two projects.However, she forgot to label the profiles, so you do not know which line applies to which project.Of the following statements regarding the profiles, which one is most reasonable?

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Multiple Choice

Q58 Q58 Q58

A college intern working at Anderson Paints evaluated potential investments that is, capital budgeting projects using the firm's average required rate of return (WACC), and he produced the following report for the capital budgeting manager:
The capital budgeting manager usually considers the risks associated with capital budgeting projects before making her final decision.If a project has a risk that is different from average, she adjusts the average required rate of return by adding or subtracting 2 percentage points.If the four projected listed above are independent, which one(s) should the capital budgeting manager recommend be purchased?

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Multiple Choice

Q59 Q59 Q59

The Seattle Corporation has been presented with an investment opportunity which will yield cash flows of $30,000 per year in Years 1 through 4, $35,000 per year in Years 5 through 9, and $40,000 in Year 10.This investment will cost the firm $150,000 today, and the firm's required rate of return is 10 percent.Assume cash flows occur evenly during the year, 1/365th each day.What is the payback period for this investment?

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Multiple Choice

Q60 Q60 Q60

You have recently accepted a one-year employment term by a firm.The firm has given you the option of receiving your salary as a lump sum value of $30,000 at the end of the year or as 12 monthly payments of $2,400 starting one month after you start work.If your relevant discount rate is 2 percent per month, then which salary options would you prefer? (Ignore taxes, risk, and consumption needs.) Choose the best answer.

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Multiple Choice

Q62 Q62 Q62

The capital budgeting director of Sparrow Corporation is evaluating a project which costs $200,000, is expected to last for 10 years and produce after-tax cash flows, including depreciation, of $44,503 per year.If the firm's required rate of return is 14 percent and its tax rate is 40 percent, what is the project's IRR?

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Q64 Q64 Q64

Michigan Mattress Company is considering the purchase of land and the construction of a new plant.The land, which be bought immediately (at t = 0), has a cost of $100,000 and the building, which would be erected at the end of the fir = 1), would cost $500,000.It is estimated that the firm's after-tax cash flow will be increased by $100,000 starting at of the second year, and that this incremental flow would increase at a 10 percent rate annually over the next 10 year the approximate payback period?

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Q65 Q65 Q65

The Seattle Corporation has been presented with an investment opportunity which will yield end of year cash flows of $30,000 per year in Years 1 through 4, $35,000 per year in Years 5 through 9, and $40,000 in Year 10.This investment will cost the firm $150,000 today, and the firm's required rate of return is 10 percent.What is the NPV for this investment?

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Q66 Q66 Q66

You are considering the purchase of an investment that would pay you $5,000 per year for Years 1-5, $3,000 per year for Years 6-8, and $2,000 per year for Years 9 and 10.If you require a 14 percent rate of return, and the cash flows occur at the end of each year, then how much should you be willing to pay for this investment?

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Q68 Q68 Q68

Two fellow financial analysts are evaluating a project with the following net cash flows: One analyst says that the project has an IRR of between 12 and 13%.The other analyst calculates an IRR of just under 800%, but fears his calculator's battery is low and may have caused an error.You agree to settle the dispute by analyzing the project cash flows.Which statement best describes the IRR for this project?

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Multiple Choice

Q77 Q77 Q77

Alyeska Salmon Inc., a large salmon canning firm operating out of Valdez, Alaska, has a new automated production line project it is considering.The project has a cost of $275,000 and is expected to provide after-tax annual cash flows of $73,306 for eight years.The firm's management is uncomfortable with the IRR reinvestment assumption and prefers the modified IRR approach.You have calculated a required rate of return for the firm of 12 percent.What is the project's MIRR?

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Multiple Choice

Q78 Q78 Q78

Below are the returns of Nulook Cosmetics and the "market" over a three-year period: Nulook finances internally using only retained earnings, and it uses the Capital Asset Pricing Model with a historical beta to determine its required rate of return.Currently, the risk-free rate is 7 percent, and the estimated market risk premium is 6 percent.Nulook is evaluating a project which has a cost today of $2,028 and will provide estimated cash inflows of $1,000 at the end of the next 3 years.What is this project's MIRR?

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Q80 Q80 Q80

Project X has a cost of $30,000 at t = 0, and it is expected to produce a uniform cash flow stream for 7 years, i.e., the CF's are the same in Years 1 through 7, and it has a regular IRR of 14 percent.The required rate of return for the project is 12 percent.What is the project's modified IRR (MIRR)?

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Multiple Choice

Q82 Q82 Q82

Capitol City Transfer Company is considering building a new terminal in Salt Lake City.If the company goes ahead with the project, it must spend $1 million immediately (at t = 0) and another $1 million at the end of Year 1 (t = 1).It will then receive net cash flows of $0.5 million at the end of Years 2-5, and it expects to sell the property and net $1 million at the end of Year 6.All cash inflows and outflows are after taxes.The company's required rate of return is 12 percent, and it uses the modified IRR criterion for capital budgeting decisions.What is the project's modified IRR (MIRR)?

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Q83 Q83 Q83

Houston Inc.is considering a project which involves building a new refrigerated warehouse which will cost $7,000,000 at t = 0 and which is expected to have operating cash flows of $500,000 at the end of each of the next 20 years.However, repairs which will cost $1,000,000 must be incurred at the end of the 10th year.Thus, at the end of Year 10 there will be a $500,000 operating cash inflow and an outflow of $1,000,000 for repairs.If Houston's required rate of return is 12 percent, what is the project's MIRR? (Hint: Think carefully about the MIRR equation and the treatment of cash outflows.)

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Q84 Q84 Q84

International Transport Company is considering building a new facility in Seattle.If the company goes ahead with the project, it will spend $2 million immediately (at t = 0) and another $2 million at the end of Year 1(t = 1).It will then receive net cash flows of $1 million at the end of Years 2-5, and it expects to sell the property for $2 million at the end of Year 6.The company's required rate of return is 12 percent, and it uses the modified IRR criterion for capital budgeting decisions.Which of the following statements is most correct?

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Multiple Choice

Q85 Q85 Q85

Mooradian Corporation estimates that its required rate of return is 11 percent.The company is considering two mutually exclusive projects whose after-tax cash flows are as follows: What is the modified internal rate of return (MIRR) of the project with the highest NPV?

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Multiple Choice

Q87 Q87 Q87

A company is analyzing two mutually exclusive projects, S and L, whose cash flows are shown below: The company's required rate of return is 12 percent.What is the IRR of the better project? (Hint: Note that the better project may or may not be the one with the higher IRR.)

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Q88 Q88 Q88

Woodson Inc.has two possible projects, Project A and Project B, with the following cash flows: At what required rate of return do the two projects have the same net present value (NPV)? (In other words, what is the "crossover rate" of the projects' NPV profiles?)

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Q89 Q89 Q89

As the capital budgeting director for Chapel Hill Coffins Company, you are evaluating construction of a new plant. The plant has a net cost of $5 million in Year 0 (today), and it will provide net cash inflows of $1 million at the end of Year 1, $1.5 million at the end of Year 2, and $2 million at the end of Years 3 through 5.Within what range is the plant's IRR?

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Q90 Q90 Q90

After getting her degree in marketing and working for 5 years for a large department store, Sally started her own spe shop in a regional mall.Sally's current lease calls for payments of $1,000 at the end of each month for the next 60 mo Now the landlord offers Sally a new 5-year lease which calls for zero rent for 6 months, then rental payments of $1,0 end of each month for the next 54 months.Sally's required rate of return is 11 percent.By what absolute dollar amou accepting the new lease change Sally's theoretical net worth? (Hint: The required rate of return per month is 11%/12 0.9166667%.)

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