Chapter 10: The Basics of Capital Budgeting: Evaluating Cash Flows
any value to be lost because the project with the higher IRR will also have the higher NPV, i.e., no conflict will exist.
r: 10.00%
Year 0 1 2 3 4
CFS −$1,025 $650 $450 $250 $50
CFL −$1,025 $100 $300 $500 $700
a. $5.47
b. $6.02
c. $6.62
d. $7.29
e. $7.82
72. Carolina Company is considering Projects S and L, whose cash flows are shown below. These projects are mutually
exclusive, equally risky, and are not repeatable. If the decision is made by choosing the project with the higher IRR, how
much value will be forgone? Note that under some conditions choosing projects on the basis of the IRR will cause $0.00
value to be lost.
r: 7.75%
Year 0 1 2 3 4
CFS −$1,050 $675 $650
CFL −$1,050 $360 $360 $360 $360
Chapter 10: The Basics of Capital Budgeting: Evaluating Cash Flows
a. $11.45
b. $12.72
c. $14.63
d. $16.82
e. $19.35
73. Silverman Co. is considering Projects S and L, whose cash flows are shown below. These projects are mutually
exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the higher MIRR rather
than the one with the higher NPV, how much value will be forgone? Note that under some conditions choosing projects
on the basis of the MIRR will cause $0.00 value to be lost.
r: 8.75%
Year 0 1 2 3 4
CFS −$1,100 $375 $375 $375 $375
CFL −$2,200 $725 $725 $725 $725
a. $32.12
b. $35.33
c. $38.87
d. $40.15
e. $42.16
Chapter 10: The Basics of Capital Budgeting: Evaluating Cash Flows
74. Farmer Co. is considering Projects S and L, whose cash flows are shown below. These projects are mutually
exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the shorter payback,
some value may be forgone. How much value will be lost in this instance? Note that under some conditions choosing
projects on the basis of the shorter payback will not cause value to be lost.
r = 10.25%
Year 0 1 2 3 4
CFS −$950 $500 $800 $0 $0
CFL −$2,100 $400 $800 $800 $1,000
a. $24.14
b. $26.82
c. $29.80
d. $33.11
e. $36.42
Chapter 10: The Basics of Capital Budgeting: Evaluating Cash Flows
75. Langton Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually
exclusive, equally risky, and not repeatable. The CEO believes the IRR is the best selection criterion, while the CFO
advocates the MIRR. If the decision is made by choosing the project with the higher IRR rather than the one with the
higher MIRR, how much, if any, value will be forgone. In other words, what’s the NPV of the chosen project versus the
maximum possible NPV? Note that (1) “true value” is measured by NPV, and (2) under some conditions the choice of
IRR vs. MIRR will have no effect on the value lost.
r = 7.00%
Year 0 1 2 3 4
CFS −$1,100 $550 $600 $100 $100
CFL −$2,750 $725 $725 $800 $1,400
a. $185.90
b. $197.01
c. $208.11
d. $219.22
e. $230.32
Chapter 10: The Basics of Capital Budgeting: Evaluating Cash Flows
76. For a project with one initial cash outflow followed by a series of positive cash inflows, the modified IRR (MIRR)
method involves compounding the cash inflows out to the end of the project’s life, summing those compounded cash flows
to form a terminal value (TV), and then finding the discount rate that causes the PV of the TV to equal the project’s cost.
a. True
b. False
77. Both the regular and the modified IRR (MIRR) methods have wide appeal to professors, but most business executives
prefer the NPV method to either of the IRR methods.
a. True
Chapter 10: The Basics of Capital Budgeting: Evaluating Cash Flows
b. False
78. When evaluating mutually exclusive projects, the modified IRR (MIRR) always leads to the same capital budgeting
decisions as the NPV method, regardless of the relative lives or sizes of the projects being evaluated.
a. True
b. False
79. The primary reason that the NPV method is conceptually superior to the IRR method for evaluating mutually
exclusive investments is that multiple IRRs may exist, and when that happens, we don’t know which IRR is relevant.
a. True
b. False
Chapter 10: The Basics of Capital Budgeting: Evaluating Cash Flows
80. The NPV and IRR methods, when used to evaluate two independent and equally risky projects, will lead to different
accept/reject decisions and thus capital budgets if the projects’ IRRs are greater than their cost of capital.
a. True
b. False
81. The NPV and IRR methods, when used to evaluate two equally risky but mutually exclusive projects, will lead to
different accept/reject decisions and thus capital budgets if the cost of capital at which the projects’ NPV profiles cross is
less than the projects’ cost of capital.
a. True
b. False
82. No conflict will exist between the NPV and IRR methods, when used to evaluate two equally risky but mutually
exclusive projects, if the projects’ cost of capital exceeds the rate at which the projects’ NPV profiles cross.
a. True
b. False
Chapter 10: The Basics of Capital Budgeting: Evaluating Cash Flows
83. 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 cost of capital, 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 cost of capital 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.
84. 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 cost of capital, then the MIRR will be less than the IRR.
c. If a project’s IRR is greater than its cost of capital, 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 cost of capital.
e. A project’s MIRR is always greater than its regular IRR.
Chapter 10: The Basics of Capital Budgeting: Evaluating Cash Flows
85. Computer Consultants Inc. is considering a project that has the following cash flow and cost of capital (r) data. What
is the project’s MIRR? Note that a project’s MIRR can be less than the cost of capital (and even negative), in which case it
will be rejected.
r = 10.00%
Year 0 1 2 3
Cash flows −$1,000 $450 $450 $450
a. 9.32%
b. 10.35%
c. 11.50%
d. 12.78%
e. 14.20%
Chapter 10: The Basics of Capital Budgeting: Evaluating Cash Flows
86. Wiley’s Wire Products is considering a project that has the following cash flow and cost of capital (r) data. What is the
project’s MIRR? Note that a project’s MIRR can be less than the cost of capital (and even negative), in which case it will
be rejected.
r = 11.00%
Year 0 1 2 3
Cash flows −$800 $350 $350 $350
a. 8.86%
b. 9.84%
c. 10.94%
d. 12.15%
e. 13.50%
87. Watts Co. is considering a project that has the following cash flow and cost of capital (r) data. What is the project’s
MIRR? Note that a project’s MIRR can be less than the cost of capital (and even negative), in which case it will be
rejected.
r = 10.00%
Year 0 1 2 3 4
Cash flows −$850 $300 $320 $340 $360
a. 14.08%
b. 15.65%
c. 17.21%
d. 18.94%
e. 20.83%
Chapter 10: The Basics of Capital Budgeting: Evaluating Cash Flows
88. Westwood Painting Co. is considering a project that has the following cash flow and cost of capital (r) data. What is
the project’s MIRR? Note that a project’s MIRR can be less than the cost of capital (and even negative), in which case it
will be rejected.
r = 12.25%
Year 0 1 2 3 4
Cash flows −$850 $300 $320 $340 $360
a. 13.42%
b. 14.91%
c. 16.56%
d. 18.22%
e. 20.04%