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67. You are on the staff of O'Hara Inc. The CFO believes project acceptance should be based on the NPV,
but Andrew O'Hara, the president, insists that no project should 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 527%, 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, although its NPV is positive,
it has an IRR that is less than the WACC.
b.
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 the firm's
value will increase if the project is accepted.
c.
You should recommend that the project be rejected. Although its NPV is positive 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.
d.
You should recommend that the project be rejected because, although its NPV is positive,
its MIRR is less than the WACC, and that indicates that the firm's value will decline if it is
accepted.
e.
You should recommend that the project be rejected because its NPV is negative and its
IRR is less than the WACC.
68. 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 less than its regular IRR.
b.
If a project's IRR is greater than its WACC, then its MIRR will be greater than the 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.
e.
A project's MIRR is always greater than its regular IRR.
69. 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 less than its regular IRR.
b.
If a project's IRR is greater than its WACC, then the MIRR will be less than the IRR.
c.
If a project's IRR is greater than its WACC, then the MIRR will be greater than the IRR.
d.
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.
e.
A project's MIRR is always greater than its regular IRR.
70. Consider 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.
If Project S has a positive NPV, Project L must also have a positive NPV.
b.
If the WACC falls, each project's IRR will increase.
c.
If the WACC increases, each project's IRR will decrease.
d.
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.
e.
Project S must have a higher NPV than Project L.
71. 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
IRR must be negative.
b.
If a project's IRR is equal to its WACC, then under all reasonable conditions the project's
NPV must be zero.
c.
There is no necessary relationship between a project's IRR, its WACC, and its NPV.
d.
When evaluating mutually exclusive projects, those projects with relatively long lives will
tend to have relatively high NPVs when the cost of capital is relatively high.
e.
If a project's IRR is equal to its WACC, then, under all reasonable conditions, the project's
NPV must be negative.
72. Clifford 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 will cross, and
the larger project will look better based on the NPV at all positive values of WACC.
b.
If the company uses the NPV method, it will tend to favor smaller, shorter-term projects
over larger, longer-term projects, regardless of how high or low the WACC is.
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 smaller project will look better if the
WACC is less than the crossover rate.
e.
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.
73. Martin Manufacturing is considering two normal, equally risky, mutually exclusive, but not repeatable
projects. Martin's WACC is 10%. 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.
Since the projects are mutually exclusive, the firm should always select Project B.
b.
If the crossover rate is 8%, Project B will have the higher NPV.
c.
Only one project has a positive NPV.
d.
If the crossover rate is 8%, Project A will have the higher NPV.
e.
Each project must have a negative 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.
Assuming the timing pattern of the two projects' cash flows is the same, Project B
probably has a higher cost (and larger scale).
b.
Assuming the two projects have the same scale, Project B probably has a faster payback
than Project A.
c.
The crossover rate for the two projects must be 12%.
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%.
e.
The crossover rate for the two projects must be less than 12%.
75. Ellmann 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 expected NPV is negative, it should be rejected.
WACC:
9.00%
Year
0
1
2
3
Cash flows
−$1,000
$500
$500
$500
a.
$265.65
b.
$278.93
c.
$292.88
d.
$307.52
e.
$322.90
76. Scott 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 expected NPV is negative, it should be rejected.
WACC:
11.00%
Year
0
1
2
3
4
Cash flows
−$1,000
$350
$350
$350
$350
a.
$77.49
b.
$81.56
c.
$85.86
d.
$90.15
e.
$94.66
77. Robbins 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 expected NPV is negative, it should be rejected.
WACC:
10.25%
Year
0
1
2
3
4
5
Cash flows
−$1,000
$300
$300
$300
$300
$300
a.
$105.89
b.
$111.47
c.
$117.33
d.
$123.51
e.
$130.01
78. Hart Corp. is considering a project that has the following cash flow data. What is the project's IRR?
Note that a project's IRR can be less than the WACC or negative, in both cases it will be rejected.
Year
0
1
2
3
Cash flows
−$1,000
$425
$425
$425
a.
12.55%
b.
13.21%
c.
13.87%
d.
14.56%
e.
15.29%
79. Spence Company is considering a project that has the following cash flow data. What is the project's
IRR? Note that a project's IRR can be less than the WACC or negative, in both cases it will be
rejected.
Year
0
1
2
3
4
Cash flows
−$1,050
$400
$400
$400
$400
a.
14.05%
b.
15.61%
c.
17.34%
d.
19.27%
e.
21.20%
80. Nichols Inc. is considering a project that has the following cash flow data. What is the project's IRR?
Note that a project's IRR can be less than the WACC or negative, in both cases it will be rejected.
Year
0
1
2
3
4
5
Cash flows
−$1,250
$325
$325
$325
$325
$325
a.
9.43%
b.
9.91%
c.
10.40%
d.
10.92%
e.
11.47%
81. McGlothin Inc. is considering a project that has the following cash flow data. What is the project's
payback?
Year
0
1
2
3
Cash flows
−$1,150
$500
$500
$500
a.
1.86 years
b.
2.07 years
c.
2.30 years
d.
2.53 years
e.
2.78 years
82. Garner Inc. is considering a project that has the following cash flow data. What is the project's
payback?
Year
0
1
2
3
Cash flows
−$350
$200
$200
$200
a.
1.42 years
b.
1.58 years
c.
1.75 years
d.
1.93 years
e.
2.12 years
83. Worthington Inc. is considering a project that has the following cash flow data. What is the project's
payback?
Year
0
1
2
3
Cash flows
−$500
$150
$200
$300
a.
2.03 years
b.
2.25 years
c.
2.50 years
d.
2.75 years
e.
3.03 years
84. Poder Inc. is considering a project that has the following cash flow data. What is the project's payback?
Year
0
1
2
3
Cash flows
−$750
$300
$325
$350
a.
1.91 years
b.
2.12 years
c.
2.36 years
d.
2.59 years
e.
2.85 years
85. Reed 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 expected NPV can be negative, in which case it will be
rejected.
WACC:
10.00%
Year
0
1
2
3
Cash flows
−$1,050
$450
$460
$470
a.
$92.37
b.
$96.99
c.
$101.84
d.
$106.93
e.
$112.28
86. Patterson Co. is considering a project that has the following cash flow and WACC data. What is the
project's NPV? Note that a project's expected NPV can be negative, in which case it will be rejected.
WACC:
10.00%
Year
0
1
2
3
Cash flows
−$950
$500
$400
$300
a.
$54.62
b.
$57.49
c.
$60.52
d.
$63.54
e.
$66.72
87. Yoga Center 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 expected NPV can be negative, in which case it will be
rejected.
WACC:
14.00%
Year
0
1
2
3
4
Cash flows
−$1,200
$400
$425
$450
$475
a.
$41.25
b.
$45.84
c.
$50.93
d.
$56.59
e.
$62.88
88. Dickson Co. is considering a project that has the following cash flow and WACC data. What is the
project's NPV? Note that a project's expected NPV can be negative, in which case it will be rejected.
WACC:
12.00%
Year
0
1
2
3
4
5
Cash flows
−$1,100
$400
$390
$380
$370
$360
a.
$250.15
b.
$277.94
c.
$305.73
d.
$336.31
e.
$369.94
89. Kiley Electronics is considering a project that has the following cash flow data. What is the project's
IRR? Note that a project's IRR can be less than the WACC (and even negative), in which case it will
be rejected.
Year
0
1
2
3
Cash flows
−$1,100
$450
$470
$490
a.
9.70%
b.
10.78%
c.
11.98%
d.
13.31%
e.
14.64%
90. Modern Refurbishing Inc. is considering a project that has the following cash flow data. What is the
project's IRR? Note that a project's IRR can be less than the WACC (and even negative), in which case
it will be rejected.
Year
0
1
2
3
4
Cash flows
−$850
$300
$290
$280
$270
a.
13.13%
b.
14.44%
c.
15.89%
d.
17.48%
e.
19.22%
91. Pet World is considering a project that has the following cash flow data. What is the project's IRR?
Note that a project's IRR can be less than the WACC (and even negative), in which case it will be
rejected.
Year
0
1
2
3
4
5
Cash flows
−$9,500
$2,000
$2,025
$2,050
$2,075
$2,100
a.
2.08%
b.
2.31%
c.
2.57%
d.
2.82%
e.
3.10%
92. Last month, Standard Systems analyzed the project whose cash flows are shown below. However,
before the decision to accept or reject the project took place, the Federal Reserve changed interest rates
and therefore the firm's WACC. The Fed's action did not affect the forecasted cash flows. By how
much did the change in the WACC affect the project's forecasted NPV? Note that a project's expected
NPV can be negative, in which case it should be rejected.
Old WACC:
10.00%
New WACC:
11.25%
Year
0
1
2
3
Cash flows
−$1,000
$410
$410
$410
a.
−$18.89
b.
−$19.88
c.
−$20.93
d.
−$22.03
e.
−$23.13
