Question 1

Which of the following ignores late cash flows?
I.Profitability index
II.Discounted payback period
III.Net present value
IV.Payback period

Accepted Answer

Both the discounted payback period and payback period ignore late cash flows, while profitability index and net present value take all cash flows into account.

Question 2

Which of the following statements is FALSE?

Accepted Answer

The NPV profile shows the NPV of a project for various discount rates, not IRRs.

Question 3

Suppose the Canadian Space Agency has two mutually exclusive projects: landing a person on Mars and landing a person on Venus.Project Mars has an IRR of 12% and project Venus has an IRR of 15%.The crossover rate is 9%.The project's appropriate discount rate is 8%.

Accepted Answer

The answer of Suppose the Canadian Space Agency has two...

Question 4

Which of the following is a discounted cash flow (DCF)approach to capital budgeting decision analysis?
I.Profitability index
II.Internal rate of return
III.Net present value
IV.Payback period

Accepted Answer

The discounted cash flow (DCF) approaches to capital budgeting decision analysis include the Profitability Index, Internal Rate of Return, and Net Present Value. These methods involve discounting future cash flows to their present value to evaluate the profitability of investments. The Payback Period is not a DCF method as it does not consider the time value of money.

Question 5

Suppose projects Mars and Venus are mutually exclusive.Project Mars has an IRR of 10% and project Venus has an IRR of 20%.One can then conclude that:

Accepted Answer

The IRR (Internal Rate of Return) provides a project's return rate, but without details on the scale of investment, cash flow timing, and the cost of capital, it's insufficient to definitively rank projects. Mutually exclusive projects require a comparison of NPVs (Net Present Values) at a specific discount rate to determine preference, as IRR alone doesn't account for scale and investment duration differences.

Question 6

Suppose the Canadian Space Agency has two independent Martian rover projects: Spirit and Endeavour.Project Spirit has an IRR of 10% and project Endeavour has an IRR of 15%.The crossover rate is 9%.The project's appropriate discount rate is 12%.

Accepted Answer

The appropriate discount rate for the projects is 12%, and both Spirit and Endeavour have IRRs higher than the discount rate. However, the crossover rate is 9%, which means that if the projects are evaluated based on their NPV (net present value), Endeavour would be the better choice. Therefore, the best choice is to only accept project Endeavour.

Question 7

Suppose the Canadian Space Agency has two mutually exclusive projects: landing a person on Mars and landing a person on Venus.Project Mars has an IRR of 12% and project Venus has an IRR of 15%.The crossover rate is 9%.The project's appropriate discount rate is 10%.

Accepted Answer

The crossover rate is the discount rate at which the NPVs of two projects are equal. In this case, the crossover rate is 9%. Since the appropriate discount rate for this decision is 10%, project Venus (with an IRR of 15%) has a higher NPV than project Mars (with an IRR of 12%) and is therefore the better choice. Therefore, the best choice is to accept project Venus (answer B) and reject project Mars (answer A). Accepting both projects (answer C) would not be optimal as it would require more resources and may not be feasible. Rejecting both projects (answer D) would mean missing out on potential opportunities for exploration and discovery.

Question 8

Suppose the Canadian Space Agency has two independent Martian rover projects: Spirit and Endeavour.Project Spirit has an IRR of 10% and project Endeavour has an IRR of15 %.The crossover rate is 9%.The project's appropriate discount rate is 18%.

Accepted Answer

The appropriate discount rate of 18% is higher than the IRR of both projects (Spirit at 10% and Endeavour at 15%), meaning neither project meets the required return threshold.

Question 9

Suppose a company has an investment that requires an after-tax incremental cash outlay of $12,000 today.It estimates that the expected future after-tax cash flows associated with this investment are $5,000 in years 1 and 2, and $8,000 in year 3.What is the approximate IRR?

Accepted Answer

To calculate the IRR, we need to find the discount rate that equates the present value of the expected future cash flows to the initial cash outlay. By using trial and error or a financial calculator, we find that a discount rate of approximately 21% would make the present value of the expected future cash flows equal to $12,000. Therefore, the IRR of this investment is approximately 21%.

Question 10

You are the CFO of a major, publicly traded corporation.You must choose between two mutually exclusive projects.You will accept a project based on which of the following?

Accepted Answer

The primary goal of a CFO in a publicly traded corporation is to maximize shareholder value. This involves choosing projects that increase the company's worth, thereby benefiting its shareholders. Accounting profit, tax benefits, and internal rate of return are important, but they are secondary to the overarching goal of enhancing shareholder value.

Question 11

Which one of the following is an example of mutual exclusive projects?
I.A piece of land may be used either for the extension of the existing plant or the building of a more efficient headquarters for the company
II.Expanding the plant or relocating the company's head office to a new location

Accepted Answer

In option I, the piece of land can only be used for either one of the projects, i.e., the extension of the existing plant or the building of a more efficient headquarters. Thus, these projects are mutually exclusive as only one of these projects can be undertaken. However, in option II, both projects can be undertaken simultaneously, i.e., expanding the plant and relocating the company's head office to a new location. Hence, option I is the example of mutual exclusive projects.

Question 12

Which of the following are NOT mutually exclusive projects?

Accepted Answer

Mutually exclusive projects are those where the choice of one project prevents the undertaking of the other projects. Selling canoes or paddles at different times does not prevent one from doing the other, making them not mutually exclusive. The other options (A, B, D) involve choices where selecting one option would prevent the selection of the other, making them mutually exclusive.

Question 13

Suppose the Canadian Space Agency has two independent Martian rover projects: Spirit and Endeavour.Project Spirit has an IRR of 13% and project Endeavour has an IRR of 15%.The crossover rate is 10%.The project's appropriate discount rate is 12%.

Accepted Answer

Since the appropriate discount rate is 12% and the crossover rate is 10%, project Endeavour's IRR of 15% is higher than both figures, indicating that the project's returns exceed the cost of capital. On the other hand, project Spirit's IRR of 13% falls below both rates, indicating a subpar ROI. As a result, accepting only project Endeavour is the best option.

Question 14

The net present value (NPV)method is preferred to the internal rate of return (IRR)method in all of the following situations, EXCEPT for:
I.mutually exclusive projects
II.projects of different scales
III.projects with multiple cash inflows and outflows

Accepted Answer

The answer of The net present value (NPV)method is preferred...

Question 15

If projects Mars and Venus are mutually exclusive, the acceptance of project Mars means:

Accepted Answer

If projects Mars and Venus are mutually exclusive, it means that only one of them can be accepted. Therefore, if project Mars is accepted, project Venus must be rejected, making option A the correct answer. The other options (B, C, and D) are not necessarily true just because project Mars is accepted.

Question 16

Suppose the Canadian Space Agency has two mutually exclusive projects: landing a person on Mars and landing a person on Venus.Project Mars has an IRR of 12% and project Venus has an IRR of 15%.The crossover rate is 9%.The project's appropriate discount rate is 18%.

Accepted Answer

The appropriate discount rate is 18%, which is higher than the IRR of both projects (Mars at 12% and Venus at 15%). Since neither project's IRR exceeds the discount rate, neither project should be accepted.

Question 17

What is the major assumption in the calculation of IRR?

Accepted Answer

The major assumption in the calculation of the Internal Rate of Return (IRR) is that every dollar of cash flows generated by the project is reinvested at the IRR itself. This assumption is often criticized for being unrealistic, especially for projects with a high IRR, as it assumes that the reinvestment can achieve the same rate of return as the original project.

Question 18

Use the following two statements to answer this question:
I.The NPV assumes that all cash flows are reinvested at the firm's cost of capital.
II.The IRR assumes that all cash flows are reinvested at the project's economic rate of return.

Accepted Answer

Both statements are correct. The NPV method assumes reinvestment at the firm's cost of capital, while the IRR method assumes reinvestment at the project's internal rate of return.

Question 19

Suppose a company has an investment that requires an after-tax incremental cash outlay of $12,000 today.It estimates that the expected future after-tax cash flows associated with this investment are $5,000 in years 1 and 2, and $8,000 in year 3.Using a 12.0% discount rate, determine the project's NPV.

Accepted Answer

The NPV is calculated by discounting the future cash flows to their present value and subtracting the initial investment. The NPV is: NPV = -12,000 + (5,000 / (1+0.12)^1) + (5,000 / (1+0.12)^2) + (8,000 / (1+0.12)^3) = $2,144.50.

Question 20

Consider the following graph:  Which capital budget criterion would yield contradictory conclusions about this project?

Accepted Answer

The answer of Consider the following graph:  Which capital...

Quiz 13: Capital Budgeting, Risk Considerations, and Other Special Issues

Which of the following ignores late cash flows? I.Profitability index II.Discounted payback period III.Net present value IV.Payback period