Chapter 12: Capital Budgeting: Decision Criteria
POINTS:
1
QUESTION TYPE:
True / False
1. A firm should never accept a project if its acceptance would lead to an increase in the firm’s cost of capital (its WACC).
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Difficulty: Easy
QUESTION TYPE:
True / False
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.12.01 – LO: 12-01
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
capital
LOCAL STANDARDS:
United States – OH – Default City – TBA
KEYWORDS:
DATE CREATED:
10/30/2017 8:07 PM
DATE MODIFIED:
1/6/2018 7:02 PM
2. Because “present value” refers to the value of cash flows that occur at different points in time, a series of present values
of cash flows should not be summed to determine the value of a capital budgeting project.
a.
True
b.
False
ANSWER:
False
POINTS:
1
QUESTION TYPE:
True / False
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.12.03 – LO: 12-3
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
capital
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
KEYWORDS:
DATE CREATED:
10/30/2017 8:07 PM
DATE MODIFIED:
1/6/2018 7:02 PM
3. Assuming that their NPVs based on the firm’s cost of capital are equal, the NPV of a project whose cash flows accrue
relatively rapidly will be more sensitive to changes in the discount rate than the NPV of a project whose cash flows come
in later in its life.
a.
True
b.
False
ANSWER:
False
POINTS:
1
Difficulty: Easy
QUESTION TYPE:
True / False
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.12.03 – LO: 12-3
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
capital
4. A basic rule in capital budgeting is that if a project’s NPV exceeds its IRR, then the project should be accepted.
a.
True
b.
False
ANSWER:
False
1
DIFFICULTY:
Difficulty: Easy
True / False
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.12.03 – LO: 12-3
United States – BUSPROG: Reflective Thinking
capital
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
NPV
DATE CREATED:
10/30/2017 8:07 PM
1/6/2018 7:02 PM
5. Conflicts between two mutually exclusive projects occasionally occur, where the NPV method ranks one project higher
but the IRR method ranks the other one first. In theory, such conflicts should be resolved in favor of the project with the
higher positive NPV.
a.
True
b.
False
ANSWER:
True
HAS VARIABLES:
False
IFMG.DAVE.19.12.03 – LO: 12-3
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
capital
LOCAL STANDARDS:
United States – OH – Default City – TBA
NPV
KEYWORDS:
DATE CREATED:
10/30/2017 8:07 PM
1/6/2018 7:02 PM
POINTS:
1
DIFFICULTY:
Difficulty: Moderate
QUESTION TYPE:
True / False
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.12.03 – LO: 12-3
6. Conflicts between two mutually exclusive projects occasionally occur, where the NPV method ranks one project higher
but the IRR method ranks the other one first. In theory, such conflicts should be resolved in favor of the project with the
higher positive IRR.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
QUESTION TYPE:
True / False
HAS VARIABLES:
False
LEARNING OBJECTIVES:
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
KEYWORDS:
DATE CREATED:
7. When considering two mutually exclusive projects, the firm should always select the project whose internal rate of
return is the highest, provided the projects have the same initial cost. This statement is true regardless of whether the
projects can be repeated or not.
a.
True
b.
False
ANSWER:
False
TOPICS:
Mutually exclusive projects
KEYWORDS:
DATE CREATED:
10/30/2017 8:07 PM
DATE MODIFIED:
1/6/2018 7:02 PM
Multiple Choice
8. 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.
The lower the cost of capital used to calculate a project’s NPV, the lower the calculated NPV will be.
b.
If a project’s NPV is less than zero, then its IRR must be less than the cost of capital.
c.
If a project’s NPV is greater than zero, then its IRR must be less than zero.
d.
The NPV of a relatively low-risk project should be found using a relatively high cost of capital.
e.
A project’s NPV is found by compounding the cash inflows at the IRR to find the terminal value (TV), then
discounting the TV at the cost of capital.
ANSWER:
b
Difficulty: Easy
QUESTION TYPE:
Multiple Choice
LEARNING OBJECTIVES:
IFMG.DAVE.19.12.03 – LO: 12-3
United States – AK – DISC: Capital budgeting and cost – DISC: Capital budgeting and cost of
capital
United States – OH – Default City – TBA
TOPICS:
NPV
TYPE: Multiple Choice: Conceptual
DATE CREATED:
10/30/2017 8:07 PM
1/6/2018 7:02 PM
9. 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.
The higher the cost of capital used to calculate the NPV, the lower the calculated NPV will be.
b.
If a project’s NPV is greater than zero, then its IRR must be less than the cost of capital.
c.
If a project’s NPV is greater than zero, then its IRR must be less than zero.
d.
The NPVs of relatively risky projects should be found using relatively low costs of capital.
e.
A project’s NPV is generally found by compounding the cash inflows at the cost of capital to find the terminal
value (TV), then discounting the TV at the IRR to find its PV.
ANSWER:
a
United States – BUSPROG: Reflective Thinking
United States – AK – DISC: Capital budgeting and cost – DISC: Capital budgeting and cost of
United States – OH – Default City – TBA
TOPICS:
Mutually exclusive projects
10/30/2017 8:07 PM
1/6/2018 7:02 PM
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Page 5
10. Ellmann Systems is considering a project that has the following cash flow and cost of capital (r) data. What is the
r:
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
ANSWER:
a
1
DIFFICULTY:
Difficulty: Easy
HAS VARIABLES:
False
LOCAL STANDARDS:
United States – OH – Default City – TBA
NPV
OTHER:
TYPE: Multiple Choice: Problem
DATE MODIFIED:
1/6/2018 7:02 PM
11. Scott Enterprises is considering a project that has the following cash flow and cost of capital (r) data. What is the
project’s NPV? Note that if a project’s expected NPV is negative, it should be rejected.
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.12.03 – LO: 12-3
capital
TOPICS:
NPV
DATE CREATED:
10/30/2017 8:07 PM
POINTS:
1
DIFFICULTY:
Difficulty: Easy
r:
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
ANSWER:
c
POINTS:
1
DIFFICULTY:
Difficulty: Easy
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.12.03 – LO: 12-3
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
capital
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
NPV
KEYWORDS:
OTHER:
TYPE: Multiple Choice: Problem
DATE CREATED:
10/30/2017 8:07 PM
DATE MODIFIED:
1/6/2018 7:02 PM
12. Robbins Inc. is considering a project that has the following cash flow and cost of capital (r) data. What is the project’s
NPV? Note that if a project’s expected NPV is negative, it should be rejected.
r:
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
ANSWER:
e
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Page 7
13. Reed Enterprises is considering a project that has the following cash flow and cost of capital (r) data. What is the
project’s NPV? Note that a project’s expected NPV can be negative, in which case it will be rejected.
r:
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
ANSWER:
a
1
DIFFICULTY:
Difficulty: Moderate
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.12.03 – LO: 12-3
capital
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
NPV
OTHER:
TYPE: Multiple Choice: Problem
DATE MODIFIED:
1/6/2018 7:02 PM
14. Patterson Co. is considering a project that has the following cash flow and cost of capital (r) data. What is the project’s
NPV? Note that a project’s expected NPV can be negative, in which case it will be rejected.
QUESTION TYPE:
Multiple Choice
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.12.03 – LO: 12-3
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
TOPICS:
NPV
KEYWORDS:
DATE CREATED:
10/30/2017 8:07 PM
r:
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
ANSWER:
c
POINTS:
1
DIFFICULTY:
Difficulty: Moderate
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.12.03 – LO: 12-3
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
NPV
KEYWORDS:
OTHER:
TYPE: Multiple Choice: Problem
DATE CREATED:
10/30/2017 8:07 PM
DATE MODIFIED:
1/6/2018 7:02 PM
15. Yoga Center Inc. is considering a project that has the following cash flow and cost of capital (r) data. What is the
project’s NPV? Note that a project’s expected NPV can be negative, in which case it will be rejected.
r:
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
ANSWER:
e
POINTS:
1
Difficulty: Moderate
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
IFMG.DAVE.19.12.03 – LO: 12-3
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
LOCAL STANDARDS:
United States – OH – Default City – TBA
NPV
KEYWORDS:
TYPE: Multiple Choice: Problem
DATE CREATED:
10/30/2017 8:07 PM
1/6/2018 7:02 PM
16. Dickson Co. is considering a project that has the following cash flow and cost of capital (r) data. What is the project’s
NPV? Note that a project’s expected NPV can be negative, in which case it will be rejected.
r:
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
ANSWER:
b
DIFFICULTY:
Difficulty: Moderate
Multiple Choice
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.12.03 – LO: 12-3
United States – BUSPROG: Analytic
capital
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
NPV
OTHER:
TYPE: Multiple Choice: Problem
10/30/2017 8:07 PM
DATE MODIFIED:
1/6/2018 7:02 PM
17. 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 cost of capital
(r). The Fed’s action did not affect the forecasted cash flows. By how much did the change in the r affect the project’s
forecasted NPV? Note that a project’s expected NPV can be negative, in which case it should be rejected.
Old r:
10.00%
New r:
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
ANSWER:
d
Old r:
10.00%
New r:
11.25%
Year
Cash flows
−$1,000
$410
$410
$410
Old NPV = $19.61 New NPV = −$2.42 Change = −$22.03
POINTS:
1
Difficulty: Moderate
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
IFMG.DAVE.19.12.03 – LO: 12-3
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
LOCAL STANDARDS:
United States – OH – Default City – TBA
NPV sensitivity to WACC
KEYWORDS:
TYPE: Multiple Choice: Problem
DATE CREATED:
10/30/2017 8:07 PM
1/6/2018 7:02 PM
18. Corner Jewelers, Inc. recently analyzed the project whose cash flows are shown below. However, before the company
decided to accept or reject the project, the Federal Reserve changed interest rates and therefore the firm’s cost of capital
(r). The Fed’s action did not affect the forecasted cash flows. By how much did the change in the r affect the project’s
forecasted NPV? Note that a project’s expected NPV can be negative, in which case it should be rejected.
Old r:
8.00%
New r:
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
ANSWER:
a
1
DIFFICULTY:
QUESTION TYPE:
19. The internal rate of return is that discount rate that equates the present value of the cash outflows (or costs) with the
present value of the cash inflows.
a.
True
b.
False
ANSWER:
True
1
DIFFICULTY:
QUESTION TYPE:
False
LEARNING OBJECTIVES:
United States – BUSPROG: Reflective Thinking
capital
LOCAL STANDARDS:
TOPICS:
IRR
DATE CREATED:
1/6/2018 7:02 PM
20. Other things held constant, an increase in the cost of capital will result in a decrease in a project’s IRR.
a.
True
b.
False
ANSWER:
False
8.00%
11.25%
Year
Old NPV = $56.61 New NPV = −$2.42 Change = −$59.03
POINTS:
1
DIFFICULTY:
Multiple Choice
HAS VARIABLES:
False
IFMG.DAVE.19.12.03 – LO: 12-3
NATIONAL STANDARDS:
capital
LOCAL STANDARDS:
NPV sensitivity to WACC
KEYWORDS:
TYPE: Multiple Choice: Problem
DATE CREATED:
DATE MODIFIED:
POINTS:
1
DIFFICULTY:
Difficulty: Easy
QUESTION TYPE:
True / False
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.12.04 – LO: 12-4
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
capital
21. A project’s IRR is independent of the firm’s cost of capital. In other words, a project’s IRR doesn’t change with a
change in the firm’s cost of capital.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Difficulty: Easy
QUESTION TYPE:
True / False
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.12.04 – LO: 12-4
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
IRR
KEYWORDS:
DATE CREATED:
10/30/2017 8:07 PM
DATE MODIFIED:
1/6/2018 7:02 PM
22. Under certain conditions, a project may have more than one IRR. One such condition is when, in addition to the initial
investment at time = 0, a negative cash flow (or cost) occurs at the end of the project’s life.
a.
True
b.
False
ANSWER:
True
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.12.04 – LO: 12-4
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
capital
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
IRR
KEYWORDS:
DATE CREATED:
10/30/2017 8:07 PM
DATE MODIFIED:
1/6/2018 7:02 PM
Copyright Cengage Learning. Powered by Cognero.
Page 13
23. The phenomenon called “multiple internal rates of return” arises when two or more mutually exclusive projects that
have different lives are compared to one another.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Difficulty: Easy
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.12.04 – LO: 12-4
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Multiple IRRs
KEYWORDS:
DATE CREATED:
10/30/2017 8:07 PM
DATE MODIFIED:
1/6/2018 7:02 PM
24. The NPV method is based on the assumption that projects’ cash flows are reinvested at the project’s risk-adjusted cost
of capital.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Difficulty: Easy
QUESTION TYPE:
True / False
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.12.04 – LO: 12-4
capital
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Reinvestment rate assumption
KEYWORDS:
DATE CREATED:
10/30/2017 8:07 PM
25. The IRR method is based on the assumption that projects’ cash flows are reinvested at the project’s risk-adjusted cost
of capital.
TOPICS:
Multiple IRRs
KEYWORDS:
DATE CREATED:
10/30/2017 8:07 PM
DATE MODIFIED:
1/6/2018 7:02 PM
Chapter 12: Capital Budgeting: Decision Criteria
POINTS:
1
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Difficulty: Easy
QUESTION TYPE:
True / False
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.12.04 – LO: 12-4
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Reinvestment rate assumption
KEYWORDS:
DATE CREATED:
10/30/2017 8:07 PM
DATE MODIFIED:
1/6/2018 7:02 PM
26. The NPV method’s assumption that cash inflows are reinvested at the cost of capital is generally more reasonable than
the IRR’s assumption that cash flows are reinvested at the IRR. This is an important reason why the NPV method is
generally preferred over the IRR method.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Difficulty: Easy
QUESTION TYPE:
True / False
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.12.04 – LO: 12-4
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
capital
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Reinvestment rate assumption
KEYWORDS:
DATE CREATED:
10/30/2017 8:07 PM
DATE MODIFIED:
1/6/2018 7:02 PM
27. Project S has a pattern of high cash flows in its early life, while Project L has a longer life, with large cash flows late
in its life. Neither has negative cash flows after Year 0, and at the current cost of capital, the two projects have identical
NPVs. Now suppose interest rates and money costs decline. Other things held constant, this change will cause L to
become preferred to S.
a.
True
b.
False
ANSWER:
True
28. An increase in the firm’s cost of capital will decrease projects’ NPVs, which could change the accept/reject decision
for any potential project. However, such a change would have no impact on projects’ IRRs. Therefore, the accept/reject
decision under the IRR method is independent of the cost of capital.
a.
True
b.
False
ANSWER:
False
POINTS:
1
Difficulty: Moderate
QUESTION TYPE:
False
NATIONAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
KEYWORDS:
10/30/2017 8:07 PM
DATE MODIFIED:
29. The IRR of normal Project X is greater than the IRR of normal Project Y, and both IRRs are greater than zero. Also,
the NPV of X is greater than the NPV of Y at the cost of capital. If the two projects are mutually exclusive, Project X
should definitely be selected, and the investment made, provided we have confidence in the data. Put another way, it is
impossible to draw NPV profiles that would suggest not accepting Project X.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
True / False
HAS VARIABLES:
False
LEARNING OBJECTIVES:
United States – BUSPROG: Reflective Thinking
capital
LOCAL STANDARDS:
TOPICS:
DATE CREATED:
1/6/2018 7:02 PM
1
DIFFICULTY:
QUESTION TYPE:
False
LEARNING OBJECTIVES:
capital
30. Normal Projects S and L have the same NPV when the discount rate is zero. However, Project S’s cash flows come in
faster than those of L. Therefore, we know that at any discount rate greater than zero, L will have the higher NPV.
a.
True
b.
False
ANSWER:
False
POINTS:
1
Difficulty: Challenging
QUESTION TYPE:
HAS VARIABLES:
False
IFMG.DAVE.19.12.04 – LO: 12-4
NATIONAL STANDARDS:
LOCAL STANDARDS:
NPV profiles
KEYWORDS:
10/30/2017 8:07 PM
DATE MODIFIED:
POINTS:
1
DIFFICULTY:
Difficulty: Easy
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
31. If the IRR of normal Project X is greater than the IRR of mutually exclusive (and also normal) Project Y, we can
conclude that the firm should always select X rather than Y if X has NPV > 0.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Difficulty: Challenging
QUESTION TYPE:
True / False
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.12.04 – LO: 12-4
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
United States – AK – DISC: Capital budgeting and cost – DISC: Capital budgeting and cost of
capital
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
NPV profiles
DATE CREATED:
10/30/2017 8:08 PM
DATE MODIFIED:
1/6/2018 7:02 PM
32. Which of the following statements is CORRECT?
a.
One defect of the IRR method versus the NPV is that the IRR does not take account of the time value of
money.
b.
One defect of the IRR method versus the NPV is that the IRR does not take account of the cost of capital.
c.
One defect of the IRR method versus the NPV is that the IRR values a dollar received today the same as a
dollar that will not be received until sometime in the future.
d.
One defect of the IRR method versus the NPV is that the IRR does not take proper account of differences in
the sizes of projects.
e.
One defect of the IRR method versus the NPV is that the IRR does not take account of cash flows over a
project’s full life.
ANSWER:
d
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
NPV profiles
KEYWORDS:
DATE CREATED:
10/30/2017 8:08 PM
DATE MODIFIED:
1/6/2018 7:02 PM
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33. 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 regular IRR is found by discounting the cash inflows at the cost of capital to find the present value
(PV), then compounding this PV to find the IRR.
b.
If a project’s IRR is greater than the WACC, then its NPV must be negative.
c.
To find a project’s IRR, we must solve for the discount rate that causes the PV of the inflows to equal the PV
of the project’s costs.
d.
To find a project’s IRR, we must find a discount rate that is equal to the cost of capital.
e.
A project’s regular IRR is found by compounding the cash inflows at the cost of capital to find the terminal
value (TV), then discounting this TV at the cost of capital.
ANSWER:
c
DIFFICULTY:
Difficulty: Easy
QUESTION TYPE:
Multiple Choice
LEARNING OBJECTIVES:
IFMG.DAVE.19.12.04 – LO: 12-4
United States – BUSPROG: Analytic
United States – AK – DISC: Capital budgeting and cost – DISC: Capital budgeting and cost of
United States – OH – Default City – TBA
TOPICS:
OTHER:
TYPE: Multiple Choice: Conceptual
10/30/2017 8:08 PM
DATE MODIFIED:
1/6/2018 7:02 PM
34. 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 regular IRR is found by compounding the cash inflows at the cost of capital to find the present
value (PV), then discounting the TV to find the IRR.
b.
If a project’s IRR is smaller than the cost of capital, then its NPV will be positive.
c.
A project’s IRR is the discount rate that causes the PV of the inflows to equal the project’s cost.
d.
If a project’s IRR is positive, then its NPV must also be positive.
e.
A project’s regular IRR is found by compounding the initial cost at the cost of capital to find the terminal value
LEARNING OBJECTIVES:
IFMG.DAVE.19.12.04 – LO: 12-4
United States – BUSPROG: Analytic
United States – AK – DISC: Capital budgeting and cost – DISC: Capital budgeting and cost of
United States – OH – Default City – TBA
TOPICS:
OTHER:
TYPE: Multiple Choice: Conceptual
DATE CREATED:
10/30/2017 8:08 PM
1/6/2018 7:02 PM
Chapter 12: Capital Budgeting: Decision Criteria
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Page 19
(TV), then discounting the TV at the cost of capital.
ANSWER:
c
Difficulty: Easy
QUESTION TYPE:
LEARNING OBJECTIVES:
United States – BUSPROG: Analytic
United States – AK – DISC: Capital budgeting and cost – DISC: Capital budgeting and cost of
United States – OH – Default City – TBA
TOPICS:
IRR
TYPE: Multiple Choice: Conceptual
DATE CREATED:
1/6/2018 7:02 PM
35. Which of the following statements is CORRECT?
a.
If a project has “normal” cash flows, then its MIRR must be positive.
b.
If a project has “normal” cash flows, then it will have exactly two real IRRs.
c.
The definition of “normal” cash flows is that the cash flow stream has one or more negative cash flows
followed by a stream of positive cash flows and then one negative cash flow at the end of the project’s life.
d.
If a project has “normal” cash flows, then it can have only one real IRR, whereas a project with “nonnormal”
cash flows might have more than one real IRR.
e.
If a project has “normal” cash flows, then its IRR must be positive.
ANSWER:
d
DIFFICULTY:
Multiple Choice
LEARNING OBJECTIVES:
United States – BUSPROG: Analytic
United States – AK – DISC: Capital budgeting and cost – DISC: Capital budgeting and cost of
LOCAL STANDARDS:
Normal vs. nonnormal CFs
OTHER:
10/30/2017 8:08 PM
DATE MODIFIED:
36. Which of the following statements is CORRECT?
a.
Projects with “normal” cash flows can have two or more real IRRs.
b.
Projects with “normal” cash flows must have two changes in the sign of the cash flows, e.g., from negative to
Chapter 12: Capital Budgeting: Decision Criteria
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positive to negative. If there are more than two sign changes, then the cash flow stream is “nonnormal.”
c.
The “multiple IRR problem” can arise if a project’s cash flows are “normal.”
d.
Projects with “nonnormal” cash flows are almost never encountered in the real world.
e.
Projects with “normal” cash flows can have only one real IRR.
ANSWER:
e
POINTS:
1
DIFFICULTY:
Difficulty: Easy
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.12.04 – LO: 12-4
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
capital
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Normal vs. nonnormal CFs
KEYWORDS:
OTHER:
TYPE: Multiple Choice: Conceptual
DATE CREATED:
10/30/2017 8:08 PM
DATE MODIFIED:
1/6/2018 7:02 PM
37. Which of the following statements is CORRECT?
a.
One defect of the IRR method is that it does not take account of the time value of money.
b.
One defect of the IRR method is that it does not take account of the cost of capital.
c.
One defect of the IRR method is that it values a dollar received today the same as a dollar that will not be
received until sometime in the future.
d.
One defect of the IRR method is that it assumes that the cash flows to be received from a project can be
reinvested at the IRR itself, and that assumption is often not valid.
e.
One defect of the IRR method is that it does not take account of cash flows over a project’s full life.
ANSWER:
d
POINTS:
1
DIFFICULTY:
Difficulty: Easy
QUESTION TYPE:
Multiple Choice
LEARNING OBJECTIVES:
IFMG.DAVE.19.12.04 – LO: 12-4
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
United States – AK – DISC: Capital budgeting and cost – DISC: Capital budgeting and cost of
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Reinvestment rate
DATE CREATED:
10/30/2017 8:08 PM