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Data Computer Systems 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.


A) 9.70%
B) 10.78%
C) 11.98%
D) 13.31%
E) 14.64%

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A company is choosing between two projects. The larger project has an initial cost of $100,000, annual cash flows of $30,000 for 5 years, and an IRR of 15.24%. The smaller project has an initial cost of $50,000, annual cash flows of $16,000 for 5 years, and an IRR of 16.63%. The projects are equally risky. Which of the following statements is CORRECT?


A) Since the smaller project has the higher IRR, the two projects' NPV profiles cannot cross, and the smaller project's NPV will be higher at all positive values of WACC.
B) Since the smaller project has the higher IRR, the two projects' NPV profiles will cross, and the larger project will look better based on the NPV at all positive values of WACC.
C) If the company uses the NPV method, it will tend to favor smaller, shorter-term projects over larger, longer-term projects, regardless of how high or low the WACC is.
D) Since the smaller project has the higher IRR but the larger project has the higher NPV at a zero discount rate, the two projects' NPV profiles will cross, and the larger project will have the higher NPV if the WACC is less than the crossover rate.
E) Since the smaller project has the higher IRR and the larger NPV at a zero discount rate, the two projects' NPV profiles will cross, and the smaller project will look better if the WACC is less than the crossover rate.

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A firm should never accept a project if its acceptance would lead to an increase in the firm's cost of capital (its WACC).

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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 project 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

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The NPV method's assumption that cash inflows are reinvested at the cost of capital is generally more reasonable than the IRR's assumption that cash flows are reinvested at the IRR. This is an important reason why the NPV method is generally preferred over the IRR method.

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Because "present value" refers to the value of cash flows that occur at different points in time, a series of present values of cash flows should not be summed to determine the value of a capital budgeting project.

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The regular payback method is deficient in that it does not take account of cash flows beyond the payback period. The discounted payback method corrects this fault.

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Simkins Renovations 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.


A) 13.13%
B) 14.44%
C) 15.89%
D) 17.48%
E) 19.22%

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Assume a project has normal cash flows. All else equal, which of the following statements is CORRECT?


A) A project's IRR increases as the WACC declines.
B) A project's NPV increases as the WACC declines.
C) A project's MIRR is unaffected by changes in the WACC.
D) A project's regular payback increases as the WACC declines.
E) A project's discounted payback increases as the WACC declines.

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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.

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Assume that the economy is enjoying a strong boom, and as a result interest rates and money costs generally are relatively high. The WACC for two mutually exclusive projects that are being considered is 12%. Project S has an IRR of 20% while Project L's IRR is 15%. The projects have the same NPV at the 12% current WACC. However, you believe that the economy will soon fall into a mild recession, and money costs and thus your WACC will soon decline. You also think that the projects will not be funded until the WACC has decreased, and their cash flows will not be affected by the change in economic conditions. Under these conditions, which of the following statements is CORRECT?


A) You should reject both projects because they will both have negative NPVs under the new conditions.
B) You should delay a decision until you have more information on the projects, even if this means that a competitor might come in and capture this market.
C) You should recommend Project L, because at the new WACC it will have the higher NPV.
D) You should recommend Project S, because at the new WACC it will have the higher NPV.
E) You should recommend Project L because it will have both a higher IRR and a higher NPV under the new conditions.

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Which of the following statements is CORRECT?


A) An NPV profile graph shows how a project's payback varies as the cost of capital changes.
B) The NPV profile graph for a normal project will generally have a positive (upward) slope as the life of the project increases.
C) An NPV profile graph is designed to give decision makers an idea about how a project's risk varies with its life.
D) An NPV profile graph is designed to give decision makers an idea about how a project's contribution to the firm's value varies with the cost of capital.
E) We cannot draw a project's NPV profile unless we know the appropriate WACC for use in evaluating the project's NPV.

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Which of the following statements is CORRECT?


A) The MIRR and NPV decision criteria can never conflict.
B) The IRR method can never be subject to the multiple IRR problem, while the MIRR method can be.
C) One reason some people prefer the MIRR to the regular IRR is that the MIRR is based on a generally more reasonable reinvestment rate assumption.
D) The higher the WACC, the shorter the discounted payback period.
E) The MIRR method assumes that cash flows are reinvested at the crossover rate.

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Harry's Inc. is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that if a project's expected NPV is negative, it should be rejected.


A) $105.89
B) $111.47
C) $117.33
D) $123.51
E) $130.01

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Four of the following statements are truly disadvantages of the regular payback method, but one is not a disadvantage of this method. Which one is NOT a disadvantage of the payback method?


A) Lacks an objective, market-determined benchmark for making decisions.
B) Ignores cash flows beyond the payback period.
C) Does not directly account for the time value of money.
D) Does not provide any indication regarding a project's liquidity or risk.
E) Does not take account of differences in size among projects.

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Other things held constant, an increase in the cost of capital will result in a decrease in a project's IRR.

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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) A project's regular IRR is found by compounding the initial cost at the WACC to find the terminal value (TV) , then discounting the TV at the WACC.
B) A project's regular IRR is found by compounding the cash inflows at the WACC to find the present value (PV) , then discounting the TV to find the IRR.
C) If a project's IRR is smaller than the WACC, then its NPV will be positive.
D) A project's IRR is the discount rate that causes the PV of the inflows to equal the project's cost.
E) If a project's IRR is positive, then its NPV must also be positive.

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A basic rule in capital budgeting is that If a project's NPV exceeds its IRR, then the project should be accepted.

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Project S has a pattern of high cash flows in its early life, while Project L has a longer life, with large cash flows late in its life. Neither has negative cash flows after Year 0, and at the current cost of capital, the two projects have identical NPVs. Now suppose interest rates and money costs decline. Other things held constant, this change will cause L to become preferred to S.

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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) A project's NPV is generally found by compounding the cash inflows at the WACC to find the terminal value (TV) , then discounting the TV at the IRR to find its PV.
B) The higher the WACC used to calculate the NPV, the lower the calculated NPV will be.
C) If a project's NPV is greater than zero, then its IRR must be less than the WACC.
D) If a project's NPV is greater than zero, then its IRR must be less than zero.
E) The NPVs of relatively risky projects should be found using relatively low WACCs.

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