Question [i]. A capital investment’s internal rate of return

[i]. A capital investment’s internal rate of return

a. Changes when the cost of capital changes.

b. Is equal to the annual net cash flows divided by one half of the project’s cost when the cash flows are an annuity.

c. Must exceed the cost of capital in order for the firm to accept the investment.

d. Is similar to the yield to maturity on a bond.

e. Statements c and d are correct.

[ii]. Which of the following statements is most correct? The modified IRR (MIRR) method:

a. Always leads to the same ranking decision as NPV for independent projects.

b. Overcomes the problem of multiple internal rates of return.

c. Compounds cash flows at the cost of capital.

d. Overcomes the problems of cash flow timing and project size that lead to criticism of the regular IRR method.

e. Statements b and c are correct.

[iii]. Which of the following statements is correct?

a. Because discounted payback takes account of the cost of capital, a project’s discounted payback is normally shorter than its regular payback.

b. The NPV and IRR methods use the same basic equation, but in the NPV method the discount rate is specified and the equation is solved for NPV, while in the IRR method the NPV is set equal to zero and the discount rate is found.

c. If the cost of capital is less than the crossover rate for two mutually exclusive projects’ NPV profiles, a NPV/IRR conflict will not occur.

d. If you are choosing between two projects that have the same life, and if their NPV profiles cross, then the smaller project will probably be the one with the steeper NPV profile.

e. If the cost of capital is relatively high, this will favor larger, longer-term projects over smaller, shorter-term alternatives because it is good to earn high rates on larger amounts over longer periods.

[iv]. When comparing two mutually exclusive projects of equal size and equal life, which of the following statements is most correct?

a. The project with the higher NPV may not always be the project with the higher IRR.

b. The project with the higher NPV may not always be the project with the higher MIRR.

c. The project with the higher IRR may not always be the project with the higher MIRR.

d. Statements a and c are correct.

e. All of the statements above are correct.

[v]. A company estimates that its weighted average cost of capital (WACC) is 10 percent. Which of the following independent projects should the company accept?

a. Project A requires an up-front expenditure of $1,000,000 and generates a net present value of $3,200.

b. Project B has a modified internal rate of return of 9.5 percent.

c. Project C requires an up-front expenditure of $1,000,000 and generates a positive internal rate of return of 9.7 percent.

d. Project D has an internal rate of return of 9.5 percent.

e. None of the projects above should be accepted.

[vi]. Which of the following is most correct?

a. The NPV and IRR rules will always lead to the same decision in choosing between mutually exclusive projects, unless one or both of the projects are “nonnormal” in the sense of having only one change of sign in the cash flow stream.

b. The Modified Internal Rate of Return (MIRR) compounds cash outflows at the cost of capital.

c. Conflicts between NPV and IRR rules arise in choosing between two mutually exclusive projects (that each have

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