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Chapter 11: Capital Budgeting Conceptual M/C Page 409
67. You are on the staff of Camden Inc. The CFO believes project
acceptance should be based on the NPV, but Steve Camden, 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 its NPV is
negative and its IRR is less than the WACC.
b. You should recommend that the project be rejected because, although
its NPV is positive, it has an IRR that is less than the WACC.
c. 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 that the
firm’s value will increase if the project is accepted.
d. You should recommend that the project be rejected because (1) its
NPV is positive and (2) 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.
e. 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.
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 greater than its regular IRR.
b. A project’s MIRR is always less than its regular IRR.
c. If a project’s IRR is greater than its WACC, then its MIRR will be
greater than the IRR.
d. 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.
e. 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.
69. 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.
Page 410 Conceptual M/C Chapter 11: Capital Budgeting
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.
70. 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 NPV must be negative.
b. If a project’s IRR is equal to its WACC, then under all reasonable
conditions, the project’s IRR must be negative.
c. If a project’s IRR is equal to its WACC, then under all reasonable
conditions the project’s NPV must be zero.
d. There is no necessary relationship between a project’s IRR, its
WACC, and its NPV.
e. 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.
71. A 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 $51,600,
annual cash flows of $16,000 for 5 years, and an IRR of 16.65%. 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 cannot cross, and the smaller project's NPV will be higher
at all positive values of WACC.
b. 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.
c. 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.
d. 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.
e. 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.
72. 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'
Chapter 11: Capital Budgeting Conceptual M/C Page 411
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.
Page 412 M/C Problems Chapter 11: Capital Budgeting
73. 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%.
74. 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 greater than its regular IRR.
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.
Multiple Choice: Problems
75. Anderson 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 projected 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
Chapter 11: Capital Budgeting M/C Problems Page 413
76. Tuttle 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 projected 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. Harry's 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
projected 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. Simms Corp. is considering a project that has the following cash flow
data. What is the project's IRR? Note that a project's projected 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%
Page 414 M/C Problems Chapter 11: Capital Budgeting
79. Warr Company is considering a project that has the following cash flow
data. What is the project's IRR? Note that a project's projected 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. Thorley Inc. is considering a project that has the following cash flow
data. What is the project's IRR? Note that a project's projected 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. Taggart 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. Resnick 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
Chapter 11: Capital Budgeting M/C Problems Page 415
e. 2.12 years
Page 416 M/C Problems Chapter 11: Capital Budgeting
83. Susmel 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. Mansi 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. Cornell 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 projected 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. Warnock 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
projected 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
Chapter 11: Capital Budgeting M/C Problems Page 417
d. $63.54
e. $66.72
Page 418 M/C Problems Chapter 11: Capital Budgeting
87. Jazz World 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
projected 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. Barry Company is considering a project that has the following cash flow
and WACC data. What is the project's NPV? Note that a project's
projected 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. Datta Computer Systems is considering a project that has the following
cash flow data. What is the project's IRR? Note that a project's
projected 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%
Chapter 11: Capital Budgeting M/C Problems Page 419
90. Simkins Renovations Inc. is considering a project that has the
following cash flow data. What is the project's IRR? Note that a
project's projected 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. Maxwell Feed & Seed is considering a project that has the following
cash flow data. What is the project's IRR? Note that a project's
projected 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, Lloyd's Systems analyzed the project whose cash flows are
shown below. However, before the decision to accept or reject the
project, the Federal Reserve took actions that 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 projected 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
Page 420 M/C Problems Chapter 11: Capital Budgeting
93. Lasik Vision Inc. recently analyzed the project whose cash flows are
shown below. However, before Lasik decided to accept or reject the
project, the Federal Reserve took actions that 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 projected NPV can
be negative, in which case it should be rejected.
Old WACC: 8.00% New WACC: 11.25%
Year 0 1 2 3
Cash flows -$1,000 $410 $410 $410
a. -$59.03
b. -$56.08
c. -$53.27
d. -$50.61
e. -$48.08
94. Ehrmann Data Systems is considering a project that has the following
cash flow and WACC data. What is the project's MIRR? Note that a
project's projected MIRR can be less than the WACC (and even negative),
in which case it will be rejected.
WACC: 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%
95. Ingram Electric Products is considering a project that has the
following cash flow and WACC data. What is the project's MIRR? Note
that a project's projected MIRR can be less than the WACC (and even
negative), in which case it will be rejected.
WACC: 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%
Chapter 11: Capital Budgeting M/C Problems Page 421
96. Malholtra Inc. is considering a project that has the following cash
flow and WACC data. What is the project's MIRR? Note that a project's
projected MIRR can be less than the WACC (and even negative), in which
case it will be rejected.
WACC: 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%
97. Hindelang Inc. is considering a project that has the following cash
flow and WACC data. What is the project's MIRR? Note that a project's
projected MIRR can be less than the WACC (and even negative), in which
case it will be rejected.
WACC: 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%
98. Stern Associates is considering a project that has the following cash
flow data. What is the project's payback?
Year 0 1 2 3 4 5
Cash flows -$1,100 $300 $310 $320 $330 $340
a. 2.31 years
b. 2.56 years
c. 2.85 years
d. 3.16 years
e. 3.52 years
99. Fernando Designs is considering a project that has the following cash
flow and WACC data. What is the project's discounted payback?
WACC: 10.00%
Year 0 1 2 3
Cash flows -$900 $500 $500 $500
a. 1.88 years
Page 422 M/C Problems Chapter 11: Capital Budgeting
b. 2.09 years
c. 2.29 years
d. 2.52 years
e. 2.78 years
100. Masulis Inc. is considering a project that has the following cash flow
and WACC data. What is the project's discounted payback?
WACC: 10.00%
Year 0 1 2 3 4
Cash flows -$950 $525 $485 $445 $405
a. 1.61 years
b. 1.79 years
c. 1.99 years
d. 2.22 years
e. 2.44 years
101. Tesar Chemicals 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 NPV. If the decision is made by
choosing the project with the higher IRR rather than the one with the
higher NPV, how much, if any, value will be forgone, i.e., what's the
chosen NPV versus the maximum possible NPV? Note that (1) “true value”
is measured by NPV, and (2) under some conditions the choice of IRR vs.
NPV will have no effect on the value gained or lost.
WACC: 7.50%
Year 0 1 2 3 4
CFS -$1,100 $550 $600 $100 $100
CFL -$2,700 $650 $725 $800 $1,400
a. $138.10
b. $149.21
c. $160.31
d. $171.42
e. $182.52
102. A firm is considering Projects S and L, whose cash flows are shown
below. These projects are mutually exclusive, equally risky, and not
repeatable. The CEO wants to use the IRR criterion, while the CFO
favors the NPV method. You were hired to advise the firm on the best
procedure. If the wrong decision criterion is used, how much potential
value would the firm lose?
WACC: 6.00%
Year 0 1 2 3 4
CFS -$1,025 $380 $380 $380 $380
CFL -$2,150 $765 $765 $765 $765
a. $188.68
Chapter 11: Capital Budgeting M/C Problems Page 423
b. $198.61
c. $209.07
d. $219.52
e. $230.49
Page 424 M/C Problems Chapter 11: Capital Budgeting
103. Sexton Inc. 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 IRR, how much value will be forgone? Note that under certain
conditions choosing projects on the basis of the IRR will not cause any
value to be lost because the one with the higher IRR will also have the
higher NPV, so no value will be lost if the IRR method is used.
WACC: 10.25%
Year 0 1 2 3 4
CFS -$2,050 $750 $760 $770 $780
CFL -$4,300 $1,500 $1,518 $1,536 $1,554
a. $134.79
b. $141.89
c. $149.36
d. $164.29
e. $205.36
104. Moerdyk & 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 IRR, how much value will be forgone? Note that under
certain conditions choosing projects on the basis of the IRR will not
cause any value to be lost because the one with the higher IRR will
also have the higher NPV, i.e., no conflict will exist.
WACC: 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
105. Kosovski 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.
WACC: 7.75%
Year 0 1 2 3 4
CFS -$1,050 $675 $650
CFL -$1,050 $360 $360 $360 $360
a. $11.45
b. $12.72
Chapter 11: Capital Budgeting M/C Problems Page 425
c. $14.63
d. $16.82
e. $19.35
106. Nast Inc. 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.
WACC: 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
107. Yonan Inc. 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.
WACC: 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
108. Noe Drilling 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, i.e., 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.
WACC: 7.00%
Page 426 M/C Problems Chapter 11: Capital Budgeting
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
