Chapter 11: The Basics of Capital Budgeting
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53. Projects S and L both have an initial cost of $10,000, followed by a series of positive cash inflows. Project S’s
undiscounted net cash flows total $20,000, while L’s total undiscounted flows are $30,000. At a WACC of 10%, the two
projects have identical NPVs. Which project’s NPV is more sensitive to changes in the WACC?
a. Project S.
b. Project L.
c. Both projects are equally sensitive to changes in the WACC since their NPVs are equal at all costs of capital.
d. Neither project is sensitive to changes in the discount rate, since both have NPV profiles that are horizontal.
e. The solution cannot be determined because the problem gives us no information that can be used to determine the
projects’ relative IRRs.
54. Projects C and D are mutually exclusive and have normal cash flows. Project C has a higher NPV if the WACC is less
than 12%, whereas Project D has a higher NPV if the WACC exceeds 12%. Which of the following statements is
CORRECT?
a. Project D probably has a higher IRR.
b. Project D is probably larger in scale than Project C.
c. Project C probably has a faster payback.
d. Project C probably has a higher IRR.
e. The crossover rate between the two projects is below 12%.
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59. Which of the following statements is CORRECT?
a. The NPV, IRR, MIRR, and discounted payback (using a payback requirement of 3 years or less) methods always
lead to the same accept/reject decisions for independent projects.
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 favor the MIRR over the
regular IRR.
d. If a firm uses the discounted payback method with a required payback of 4 years, then it will accept more projects
than if it used a regular payback of 4 years.
e. The percentage difference between the MIRR and the IRR is equal to the project’s WACC.
60. Which of the following statements is CORRECT?
a. For a project with normal cash flows, any change in the WACC will change both the NPV and the IRR.
b. To find the MIRR, we first compound cash flows at the regular IRR to find the TV, and then we discount the TV
at the WACC to find the PV.
c. The NPV and IRR methods both assume that cash flows can be reinvested at the WACC. However, the MIRR
method assumes reinvestment at the MIRR itself.
d. If two projects have the same cost, and if their NPV profiles cross in the upper right quadrant, then the project
with the higher IRR probably has more of its cash flows coming in the later years.
e. If two projects have the same cost, and if their NPV profiles cross in the upper right quadrant, then the project
with the lower IRR probably has more of its cash flows coming in the later years.
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63. Projects S and L are equally risky, mutually exclusive, and have normal cash flows. Project S has an IRR of 15%,
while Project L’s IRR is 12%. The two projects have the same NPV when the WACC is 7%. Which of the following
statements is CORRECT?
a. If the WACC is 10%, both projects will have positive NPVs.
b. If the WACC is 6%, Project S will have the higher NPV.
c. If the WACC is 13%, Project S will have the lower NPV.
d. If the WACC is 10%, both projects will have a negative NPV.
e. Project S’s NPV is more sensitive to changes in WACC than Project L’s.
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64. Westchester Corp. is considering two equally risky, mutually exclusive projects, both of which have normal cash
flows. Project A has an IRR of 11%, while Project B’s IRR is 14%. When the WACC is 8%, the projects have the same
NPV. Given this information, which of the following statements is CORRECT?
a. If the WACC is 13%, Project A’s NPV will be higher than Project B’s.
b. If the WACC is 9%, Project A’s NPV will be higher than Project B’s.
c. If the WACC is 6%, Project B’s NPV will be higher than Project A’s.
d. If the WACC is greater than 14%, Project A’s IRR will exceed Project B’s.
e. If the WACC is 9%, Project B’s NPV will be higher than Project A’s.
65. You are considering two mutually exclusive, equally risky, projects. Both have IRRs that exceed the WACC. Which
of the following statements is CORRECT? Assume that the projects have normal cash flows, with one outflow followed
by a series of inflows.
a. If the two projects’ NPV profiles do not cross, then there will be a sharp conflict as to which one should be
selected.
b. If the cost of capital is greater than the crossover rate, then the IRR and the NPV criteria will not result in a
conflict between the projects. One project will rank higher by both criteria.
c. If the cost of capital is less than the crossover rate, then the IRR and the NPV criteria will not result in a conflict
between the projects. One project will rank higher by both criteria.
d. For a conflict to exist between NPV and IRR, the initial investment cost of one project must exceed the cost of the
other.
e. For a conflict to exist between NPV and IRR, one project must have an increasing stream of cash flows over time
while the other has a decreasing stream. If both sets of cash flows are increasing or decreasing, then it would be
impossible for a conflict to exist, even if one project is larger than the other.
Chapter 11: The Basics of Capital Budgeting
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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.
e. To find a project’s MIRR, we compound cash inflows at the IRR and then discount the terminal value back to t =
0 at the WACC.
70. Projects S and L both have normal cash flows, and the projects have the same risk, hence both are evaluated with the
same WACC, 10%. However, S has a higher IRR than L. Which of the following statements is CORRECT?
a. Project S must have a higher NPV than Project L.
b. If Project S has a positive NPV, Project L must also have a positive NPV.
c. If the WACC falls, each project’s IRR will increase.
d. If the WACC increases, each project’s IRR will decrease.
e. If Projects S and L have the same NPV at the current WACC, 10%, then Project L, the one with the lower IRR,
would have a higher NPV if the WACC used to evaluate the projects declined.
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73. 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%. Assuming the projects’ NPV profiles cross in the upper right quadrant, 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. Only one project has a positive NPV.
e. If the crossover rate is 8%, Project A will have the higher NPV.
74. Projects A and B are mutually exclusive and have normal cash flows. Project A has an IRR of 15% and 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. The crossover rate for the two projects must be 12%.
e. 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%.
