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

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

Question
[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 normal cash flows) when the cost of capital exceeds the crossover rate (that is, the discount rate at which the NPV profiles cross).

d. The discounted payback method overcomes the problems that the payback method has with cash flows occurring after the payback period.

e. None of the statements above is correct.

[vii]. Which of the following statements is most correct?

a. The IRR method is appealing to some managers because it produces a rate of return upon which to base decisions rather than a dollar amount like the NPV method.

b. The discounted payback method solves all the problems associated with the payback method.

c. For independent projects, the decision to accept or reject will always be the same using either the IRR method or the NPV method.

d. Statements a and c are correct.

e. All of the statements above are correct.

[viii]. Which of the following statements is most correct?

a. One of the disadvantages of choosing between mutually exclusive projects on the basis of the discounted payback method is that you might choose the project with the faster payback period but with the lower total return.

b. Multiple IRRs can occur in cases when project cash flows are normal, but they are more common in cases where project cash flows are nonnormal.

c. When choosing between mutually exclusive projects, managers should accept all projects with IRRs greater than the weighted average cost of capital.

d. Statements a and b are correct.

e. All of the statements above are correct.

[ix]. Normal projects C and D are mutually exclusive. Project C has a higher net present value if the WACC is less than 12 percent, whereas Project D has a higher net present value if the WACC exceeds 12 percent. Which of the following statements is most correct?

a. Project D has a higher internal rate of return.

b. Project D is probably larger in scale than Project C.

c. Project C probably has a faster payback.

d. Statements a and c are correct.

e. All of the statements above are correct.