Chapter 12: Capital Budgeting: Decision Criteria
POINTS:
1
Difficulty: Moderate
QUESTION TYPE:
False
LEARNING OBJECTIVES:
NATIONAL STANDARDS:
capital
c.
11.98%
d.
13.31%
e.
14.64%
ANSWER:
d
POINTS:
1
Difficulty: Moderate
QUESTION TYPE:
HAS VARIABLES:
False
IFMG.DAVE.19.12.04 – LO: 12-4
NATIONAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
IRR
KEYWORDS:
TYPE: Multiple Choice: Problem
DATE CREATED:
1/6/2018 7:02 PM
66. 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 cost of capital (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%
ANSWER:
a
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67. 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 cost of capital (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%
ANSWER:
c
POINTS:
1
Difficulty: Moderate
Multiple Choice
HAS VARIABLES:
False
IFMG.DAVE.19.12.04 – LO: 12-4
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
capital
LOCAL STANDARDS:
United States – OH – Default City – TBA
IRR
KEYWORDS:
TYPE: Multiple Choice: Problem
10/30/2017 8:08 PM
DATE MODIFIED:
1/6/2018 7:02 PM
68. Current Design Co. is considering two mutually exclusive, equally risky, and not repeatable projects, S and L. Their
cash flows are shown below. 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.
r:
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
IRR
KEYWORDS:
TYPE: Multiple Choice: Problem
10/30/2017 8:08 PM
DATE MODIFIED:
1/6/2018 7:02 PM
Chapter 12: Capital Budgeting: Decision Criteria
Difficulty: Moderate
Multiple Choice
HAS VARIABLES:
False
IFMG.DAVE.19.12.04 – LO: 12-4
NATIONAL STANDARDS:
capital
LOCAL STANDARDS:
NPV vs. IRR
KEYWORDS:
TYPE: Multiple Choice: Problem
10/30/2017 8:08 PM
DATE MODIFIED:
b.
$149.21
c.
$160.31
d.
$171.42
e.
$182.52
ANSWER:
POINTS:
1
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69. Murray 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 wants to use the IRR criterion, while the CFO favors the NPV
method. You were hired to advise Murray on the best procedure. If the wrong decision criterion is used, how much
potential value would Murray lose?
r:
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
b.
$198.61
c.
$209.07
d.
$219.52
e.
$230.49
S
L
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POINTS:
1
Difficulty: Challenging
Multiple Choice
HAS VARIABLES:
False
IFMG.DAVE.19.12.04 – LO: 12-4
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
NPV vs. IRR
KEYWORDS:
TYPE: Multiple Choice: Problem
DATE CREATED:
10/30/2017 8:08 PM
1/6/2018 7:02 PM
70. Projects S and L, whose cash flows are shown below, are mutually exclusive, equally risky, and not repeatable.
Hooper Inc. is considering which of these two projects to undertake. 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 project with the higher IRR will also have the higher NPV, so no value
will be lost if the IRR method is used.
r:
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
Chapter 12: Capital Budgeting: Decision Criteria
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Page 46
e.
$205.36
$358.05
$507.40
POINTS:
1
Difficulty: Challenging
QUESTION TYPE:
Multiple Choice
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.12.04 – LO: 12-4
United States – BUSPROG: Analytic
capital
United States – OH – Default City – TBA
TOPICS:
NPV vs. IRR
OTHER:
TYPE: Multiple Choice: Problem
DATE CREATED:
10/30/2017 8:08 PM
1/6/2018 7:02 PM
71. Markman & Sons is considering Projects S and L. These projects are mutually exclusive, equally risky, and not
repeatable and their cash flows are shown below. 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 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
Chapter 12: Capital Budgeting: Decision Criteria
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Page 47
d.
$7.29
e.
$7.82
POINTS:
1
Difficulty: Challenging
QUESTION TYPE:
False
LEARNING OBJECTIVES:
United States – BUSPROG: Analytic
capital
United States – OH – Default City – TBA
TOPICS:
TYPE: Multiple Choice: Problem
DATE CREATED:
1/6/2018 7:02 PM
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
a.
$11.45
b.
$12.72
Chapter 12: Capital Budgeting: Decision Criteria
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Page 48
c.
$14.63
d.
$16.82
e.
$19.35
ANSWER:
b
POINTS:
1
Difficulty: Challenging
QUESTION TYPE:
Multiple Choice
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.12.04 – LO: 12-4
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
TOPICS:
NPV vs. IRR
KEYWORDS:
TYPE: Multiple Choice: Problem
DATE CREATED:
10/30/2017 8:08 PM
1/6/2018 7:02 PM
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
Chapter 12: Capital Budgeting: Decision Criteria
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Page 49
c.
$38.87
d.
$40.15
e.
$42.16
d
POINTS:
1
HAS VARIABLES:
False
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
capital
LOCAL STANDARDS:
United States – OH – Default City – TBA
KEYWORDS:
DATE MODIFIED:
1/6/2018 7:02 PM
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
Chapter 12: Capital Budgeting: Decision Criteria
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b.
$26.82
c.
$29.80
d.
$33.11
e.
$36.42
d
POINTS:
1
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
LOCAL STANDARDS:
United States – OH – Default City – TBA
KEYWORDS:
DATE CREATED:
10/30/2017 8:08 PM
DATE MODIFIED:
1/6/2018 7:02 PM
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%
Chapter 12: Capital Budgeting: Decision Criteria
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Page 51
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
ANSWER:
NPV based on
NPV based on
NPV using
POINTS:
1
Difficulty: Challenging
QUESTION TYPE:
Multiple Choice
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.12.04 – LO: 12-4
United States – OH – Default City – TBA
TOPICS:
IRR vs. MIRR
KEYWORDS:
TYPE: Multiple Choice: Problem
1/6/2018 7:02 PM
76. For a project with one initial cash outflow followed by a series of positive cash inflows, the modified IRR (MIRR)
Chapter 12: Capital Budgeting: Decision Criteria
DIFFICULTY:
Difficulty: Easy
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
True
POINTS:
1
Difficulty: Easy
QUESTION TYPE:
True / False
HAS VARIABLES:
False
IFMG.DAVE.19.12.05 – LO: 12-5
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
LOCAL STANDARDS:
United States – OH – Default City – TBA
Modified IRR
KEYWORDS:
10/30/2017 8:08 PM
DATE MODIFIED:
1/6/2018 7:02 PM
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
b.
False
ANSWER:
False
POINTS:
1
Difficulty: Easy
QUESTION TYPE:
True / False
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.12.05 – LO: 12-5
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
United States – OH – Default City – TBA
TOPICS:
Modified IRR
DATE CREATED:
10/30/2017 8:08 PM
DATE MODIFIED:
1/6/2018 7:02 PM
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
ANSWER:
False
1
DIFFICULTY:
Difficulty: Moderate
True / False
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.12.05 – LO: 12-5
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
ANSWER:
False
1
DIFFICULTY:
Difficulty: Moderate
QUESTION TYPE:
True / False
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.12.05 – LO: 12-5
United States – BUSPROG: Reflective Thinking
capital
United States – OH – Default City – TBA
TOPICS:
NPV vs. IRR
DATE CREATED:
10/30/2017 8:08 PM
DATE MODIFIED:
1/6/2018 7:02 PM
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
ANSWER:
False
QUESTION TYPE:
True / False
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.12.05 – LO: 12-5
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
United States – OH – Default City – TBA
TOPICS:
Modified IRR
KEYWORDS:
10/30/2017 8:08 PM
DATE MODIFIED:
1/6/2018 7:02 PM
1
DIFFICULTY:
Difficulty: Moderate
True / False
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.12.05 – LO: 12-5
United States – BUSPROG: Reflective Thinking
capital
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
NPV vs. IRR
DATE CREATED:
10/30/2017 8:08 PM
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
ANSWER:
False
1
DIFFICULTY:
Difficulty: Moderate
QUESTION TYPE:
True / False
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.12.05 – LO: 12-5
United States – BUSPROG: Reflective Thinking
capital
United States – OH – Default City – TBA
TOPICS:
NPV vs. IRR
DATE MODIFIED:
1/6/2018 7:02 PM
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
ANSWER:
True
LOCAL STANDARDS:
United States – OH – Default City – TBA
NPV vs. IRR
KEYWORDS:
DATE CREATED:
10/30/2017 8:08 PM
1/6/2018 7:02 PM
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.
ANSWER:
d
Answer d is essentially the definition of the MIRR; hence, it is correct.
POINTS:
1
Difficulty: Challenging
Multiple Choice
HAS VARIABLES:
False
IFMG.DAVE.19.12.05 – LO: 12-5
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
LOCAL STANDARDS:
United States – OH – Default City – TBA
KEYWORDS:
TYPE: Multiple Choice: Conceptual
1/6/2018 7:02 PM
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.
ANSWER:
b
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85. Computer Consultants Inc. is considering a project that has the following cash flow and cost of capital (r) data. What
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%
ANSWER:
e
POINTS:
1
Difficulty: Moderate
Multiple Choice
HAS VARIABLES:
False
IFMG.DAVE.19.12.05 – LO: 12-5
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
capital
MIRR
Difficulty: Challenging
QUESTION TYPE:
Multiple Choice
False
IFMG.DAVE.19.12.05 – LO: 12-5
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
capital
United States – OH – Default City – TBA
MIRR
KEYWORDS:
TYPE: Multiple Choice: Conceptual
DATE CREATED:
10/30/2017 8:08 PM
1/6/2018 7:02 PM