CHAPTER 12—CAPITAL BUDGETING: DECISION RULES
TYPE: Multiple Choice: Problem
83. Worthington 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.
b.
c.
d.
e.
Difficulty: Easy
INTE.GENE.16.82 – LO: 12-7
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TYPE: Multiple Choice: Problem
84. Poder 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.
b.
c.
d.
e.
CHAPTER 12—CAPITAL BUDGETING: DECISION RULES
85. Reed 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 expected 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
a
Difficulty: Moderate
INTE.GENE.16.79 – LO: 12-3
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NPV
TYPE: Multiple Choice: Problem
86. Patterson Co. is considering a project that has the following cash flow and WACC data. What is the project’s NPV?
Note that a project’s expected 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
Difficulty: Easy
INTE.GENE.16.82 – LO: 12-7
United States – BUSPROG: Analytic
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Payback
TYPE: Multiple Choice: Problem
CHAPTER 12—CAPITAL BUDGETING: DECISION RULES
a.
$54.62
b.
$57.49
c.
$60.52
d.
$63.54
e.
$66.72
c
Difficulty: Moderate
INTE.GENE.16.79 – LO: 12-3
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NPV
TYPE: Multiple Choice: Problem
87. Yoga Center 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 expected 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
e
Difficulty: Moderate
INTE.GENE.16.79 – LO: 12-3
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NPV
CHAPTER 12—CAPITAL BUDGETING: DECISION RULES
88. Dickson Co. is considering a project that has the following cash flow and WACC data. What is the project’s NPV?
Note that a project’s expected 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
Difficulty: Moderate
INTE.GENE.16.79 – LO: 12-3
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NPV
TYPE: Multiple Choice: Problem
89. Kiley Electronics 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 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%
Difficulty: Moderate
TYPE: Multiple Choice: Problem
CHAPTER 12—CAPITAL BUDGETING: DECISION RULES
90. 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 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%
a
Difficulty: Moderate
INTE.GENE.16.80 – LO: 12-4
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TYPE: Multiple Choice: Problem
91. 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 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%
c
INTE.GENE.16.80 – LO: 12-4
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TYPE: Multiple Choice: Problem
CHAPTER 12—CAPITAL BUDGETING: DECISION RULES
92. 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 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 expected 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
Difficulty: Moderate
INTE.GENE.16.79 – LO: 12-3
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NPV sensitivity to WACC
TYPE: Multiple Choice: Problem
93. 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 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 expected NPV can be negative, in which case it should be rejected.
Difficulty: Moderate
INTE.GENE.16.80 – LO: 12-4
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TYPE: Multiple Choice: Problem
CHAPTER 12—CAPITAL BUDGETING: DECISION RULES
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
a
Difficulty: Moderate
INTE.GENE.16.79 – LO: 12-3
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NPV sensitivity to WACC
TYPE: Multiple Choice: Problem
94. Computer Consultants 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 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%
e
CHAPTER 12—CAPITAL BUDGETING: DECISION RULES
95. Wiley’s Wire 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 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%
e
Difficulty: Moderate
INTE.GENE.16.81 – LO: 12-5
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MIRR
TYPE: Multiple Choice: Problem
96. Watts Co. is considering a project that has the following cash flow and WACC data. What is the project’s MIRR? Note
that a project’s 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
Difficulty: Moderate
INTE.GENE.16.81 – LO: 12-5
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
MIRR
TYPE: Multiple Choice: Problem
CHAPTER 12—CAPITAL BUDGETING: DECISION RULES
a.
14.08%
b.
15.65%
c.
17.21%
d.
18.94%
e.
20.83%
Difficulty: Moderate
INTE.GENE.16.81 – LO: 12-5
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MIRR
TYPE: Multiple Choice: Problem
97. Westwood Painting Co. is considering a project that has the following cash flow and WACC data. What is the
project’s MIRR? Note that a project’s 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%
c
CHAPTER 12—CAPITAL BUDGETING: DECISION RULES
98. Suzanne’s Cleaners 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.
b.
c.
d.
e.
e
Difficulty: Moderate
INTE.GENE.16.82 – LO: 12-7
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Payback
TYPE: Multiple Choice: Problem
99. Craig’s Car Wash 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
Cash flows
−$900
$500
$500
$500
a.
b.
Difficulty: Moderate
INTE.GENE.16.81 – LO: 12-5
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capital
United States – OH – Default City – TBA
MIRR
TYPE: Multiple Choice: Problem
CHAPTER 12—CAPITAL BUDGETING: DECISION RULES
c.
d.
e.
Difficulty: Moderate
INTE.GENE.16.82 – LO: 12-7
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Discounted payback
TYPE: Multiple Choice: Problem
100. Shannon Co. 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.
b.
c.
d.
e.
Difficulty: Moderate
INTE.GENE.16.82 – LO: 12-7
United States – BUSPROG: Analytic
United States – AK – DISC: Capital budgeting and cost – DISC: Capital budgeting and cost of
CHAPTER 12—CAPITAL BUDGETING: DECISION RULES
a
101. 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.
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
capital
CHAPTER 12—CAPITAL BUDGETING: DECISION RULES
102. 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?
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
b.
$198.61
c.
$209.07
d.
$219.52
e.
$230.49
c
capital
CHAPTER 12—CAPITAL BUDGETING: DECISION RULES
CHAPTER 12—CAPITAL BUDGETING: DECISION RULES
103. 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.
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
c
Difficulty: Challenging
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NPV vs. IRR
TYPE: Multiple Choice: Problem
104. 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
CHAPTER 12—CAPITAL BUDGETING: DECISION RULES
any value to be lost because the project 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
e
105. 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.
WACC:
7.75%
Year
0
1
2
3
4
CHAPTER 12—CAPITAL BUDGETING: DECISION RULES
CFS
−$1,050
$675
$650
CFL
−$1,050
$360
$360
$360
$360
a.
$11.45
b.
$12.72
c.
$14.63
d.
$16.82
e.
$19.35
capital
106. 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.
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
CHAPTER 12—CAPITAL BUDGETING: DECISION RULES
c.
$38.87
d.
$40.15
e.
$42.16
107. 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.
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
CHAPTER 12—CAPITAL BUDGETING: DECISION RULES
108. 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.
WACC:
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 12—CAPITAL BUDGETING: DECISION RULES