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A 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 is less than the rate at which the projects' NPV profiles cross.

A) True
B) False

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Which of the following statements is CORRECT?


A) The NPV, IRR, MIRR, and discounted payback (using a payback requirement of 3 years or less) methods always lead to the same accept/reject decisions for independent projects.
B) For mutually exclusive projects with normal cash flows, the NPV and MIRR methods can never conflict, but their results could conflict with the discounted payback and the regular IRR methods.
C) Multiple IRRs can exist, but not multiple MIRRs. This is one reason some people favor the MIRR over the regular IRR.
D) If a firm uses the discounted payback method with a required payback of 4 years, then it will accept more projects than if it used a regular payback of 4 years.
E) The percentage difference between the MIRR and the IRR is equal to the project's WACC.

F) B) and D)
G) A) and B)

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Maxwell Feed & Seed is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's projected IRR can be less than the WACC (and even negative) , in which case it will be rejected.


A) 2.08%
B) 2.31%
C) 2.57%
D) 2.82%
E) 3.10%

F) A) and E)
G) A) and D)

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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

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Warnock 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 projected NPV can be negative, in which case it will be rejected.


A) $54.62
B) $57.49
C) $60.52
D) $63.54
E) $66.72

F) C) and E)
G) A) and D)

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Cornell 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 projected NPV can be negative, in which case it will be rejected.


A) $ 92.37
B) $ 96.99
C) $101.84
D) $106.93
E) $112.28

F) A) and E)
G) C) and E)

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An increase in the firm's WACC 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

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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) If Project A has a higher IRR than Project B, then Project A must have the lower NPV.
B) If Project A has a higher IRR than Project B, then Project A must also have a higher NPV.
C) The IRR calculation implicitly assumes that all cash flows are reinvested at the WACC.
D) The IRR calculation implicitly assumes that cash flows are withdrawn from the business rather than being reinvested in the business.
E) If a project has normal cash flows and its IRR exceeds its WACC, then the project's NPV must be positive.

F) B) and C)
G) A) and D)

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Which of the following statements is CORRECT?


A) The internal rate of return method (IRR) is generally regarded by academics as being the best single method for evaluating capital budgeting projects.
B) The payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects.
C) The discounted payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects.
D) The net present value method (NPV) is generally regarded by academics as being the best single method for evaluating capital budgeting projects.
E) The modified internal rate of return method (MIRR) is generally regarded by academics as being the best single method for evaluating capital budgeting projects.

F) A) and B)
G) A) and C)

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Conflicts between two mutually exclusive projects occasionally occur, where the NPV method ranks one project higher but the IRR method puts the other one first. In theory, such conflicts should be resolved in favor of the project with the higher NPV.

A) True
B) False

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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 costs of capital.

A) True
B) False

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Kosovski 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.


A) $11.45
B) $12.72
C) $14.63
D) $16.82
E) $19.35

F) A) and D)
G) B) and E)

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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

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Thorley Inc. is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's projected IRR can be less than the WACC or negative, in both cases it will be rejected.


A) 9.43%
B) 9.91%
C) 10.40%
D) 10.92%
E) 11.47%

F) A) and C)
G) C) and D)

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Sexton Inc. 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 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 one with the higher IRR will also have the higher NPV, so no value will be lost if the IRR method is used.


A) $134.79
B) $141.89
C) $149.36
D) $164.29
E) $205.36

F) B) and D)
G) A) and B)

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Jazz World 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 projected NPV can be negative, in which case it will be rejected.


A) $41.25
B) $45.84
C) $50.93
D) $56.59
E) $62.88

F) A) and E)
G) A) and D)

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Which of the following statements is CORRECT?


A) One defect of the IRR method is that it does not take account of cash flows over a project's full life.
B) One defect of the IRR method is that it does not take account of the time value of money.
C) One defect of the IRR method is that it does not take account of the cost of capital.
D) 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.
E) 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.

F) A) and C)
G) C) and D)

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Projects A and B have identical expected lives and identical initial cash outflows (costs) Which of the following statements is CORRECT?


A) More of Project A's cash flows occur in the later years.
B) More of Project B's cash flows occur in the later years.
C) We must have information on the cost of capital in order to determine which project has the larger early cash flows.
D) The NPV profile graph is inconsistent with the statement made in the problem.
E) The crossover rate, i.e., the rate at which Projects A and B have the same NPV, is greater than either project's IRR.

F) None of the above
G) A) and D)

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Tesar Chemicals 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 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.


A) $138.10
B) $149.21
C) $160.31
D) $171.42
E) $182.52

F) B) and D)
G) B) and C)

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A firm 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 the firm on the best procedure. If the wrong decision criterion is used, how much potential value would the firm lose?


A) $188.68
B) $198.61
C) $209.07
D) $219.52
E) $230.49

F) D) and E)
G) B) and C)

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