96.
Which of the following is incorrect regarding the IRR statistic?
97.
Which of the following statements is correct?
98.
Which of the following best describes the NPV profile?
99.
Which of the following statements is correct regarding the NPV profile?
100.
A firm is evaluating a potential investment that is expected to generate cash flows of $100
in years 1 through 4 and $400 in years 5 through 7. The initial investment is $750. What is
the payback for this investment?
101.
A company is considering two mutually exclusive projects, A and B. Project A requires an
initial investment of $100, followed by cash flows of $95, $20, and $5. Project B requires
an initial investment of $100, followed by cash flows of $0, $20, and $130. What is the IRR
of the project that is best for the company’s shareholders? The firm’s cost of capital is 10
percent.
102.
A company is considering two mutually exclusive projects, A and B. Project A requires an
initial investment of $200, followed by cash flows of $185, $40, and $15. Project B requires
an initial investment of $200, followed by cash flows of $0, $50, and $230. What is the IRR
of the project that is best for the company’s shareholders? The firm’s cost of capital is 10
percent.
103.
A financial asset will pay you $10,000 at the end of 10 years if you pay premiums of $175
per year at the end of each year for 10 years. What is the IRR of this financial asset?
104.
A financial asset will pay you $50,000 at the end of 20 years if you pay premiums of $975
per year at the end of each year for 20 years. What is the IRR of this financial asset?
105.
Projects A and B are mutually exclusive. Project A costs $10,000 and is expected to
generate cash inflows of $4,000 for four years. Project B costs $10,000 and is expected to
generate a single cash flow in year 4 of $20,000. The cost of capital is 12 percent. Which
project would you accept and why?
106.
Projects A and B are mutually exclusive. Project A costs $20,000 and is expected to
generate cash inflows of $7,500 for 4 years. Project B costs $10,000 and is expected to
generate a single cash flow in year 4 of $20,000. The cost of capital is 12%. Which project
would you accept and why?
107.
The least-used capital budgeting technique in industry is:
108.
We accept projects with a positive NPV because it means that:
109.
The MIRR statistic is different from the IRR statistic in that:
110.
A disadvantage of the payback statistic is that:
111.
A project costs $91,000 today and is expected to generate cash flows of $11,000 per year
for the next 20 years. The firm has a cost of capital of 8 percent. Should this project be
accepted, and why?
112.
A project costs $101,000 today and is expected to generate cash flows of $31,000 per year
for the next 15 years. At what rate is the NPV equal to zero?
Essay Questions
113.
Compare and contrast the IRR and the MIRR statistic.
114.
Why is a project’s cost not an appropriate benchmark for its NPV?
115.
Suppose two projects with normal cash flows, X and Y, have exactly the same required
initial investment, but X has a longer payback. Can we say anything about X’s IRR versus
that of Y?
116.
For a project with normal cash flows, what would you expect the relationship to be
between the MIRR and the IRR?
117.
Rank the capital budgeting tools from best to worst.
118.
Is the following set of cash flows depicted normal or non-normal? Explain.
119.
Explain what a PI of 35.23 percent would signify.
120.
Explain the differing reinvestment rate assumptions of NPV and IRR.
121.
Explain the Rule of Signs as it pertains to IRR.
122.
Calculate the rate at which the follow projects’ NPV profiles cross and explain when IRR
will give the correct answer when choosing between these two mutually exclusive
projects.
123.
Define and compare the use of the payback (PB) and discounted payback (DPB) methods
for evaluating capital investment opportunities.
124.
Define and evaluate the net present value (NPV) method of evaluating capital investment
opportunities.
125.
Contrast the use of the internal rate of return (IRR) versus the modified internal rate of
return (MIRR) methods for evaluating capital investment opportunities.
126.
Use NPV profiles to reconcile sources of conflict between NPV and IRR methods.
127.
How does profitability index differ from the other statistics discussed in this chapter?