Bus fin final

Which of the following statements is CORRECT?

• One advantage of the NPV over the IRR is that NPV takes account of cash flows over a project's

  full life whereas IRR does not.

• One advantage of the NPV over the IRR is that NPV assumes that cash flows will be reinvested at

  the WACC, whereas IRR assumes that cash flows are reinvested at the IRR. The NPV assumption

  is generally more appropriate.

• One advantage of the NPV over the MIRR method is that NPV takes account of cash flows over a

  project's full life whereas MIRR does not.

• One advantage of the NPV over the MIRR method is that NPV discounts cash flows whereas the

  MIRR is based on undiscounted cash flows.

• Since cash flows under the IRR and MIRR are both discounted at the same rate (the WACC),

  these two methods always rank mutually exclusive projects in the same order.

Westchester Corp. is considering two equally risky, mutually exclusive projects, both of which have

normal cash flows. Project A has an IRR of 11%, while Project B's IRR is 14%. When the WACC is 8%,

the projects have the same NPV. Given this information, which of the following statements is

CORRECT?

• If the WACC is 13%, Project A's NPV will be higher than Project B's.

• If the WACC is 9%, Project A's NPV will be higher than Project B's.

• If the WACC is 6%, Project B's NPV will be higher than Project A's.

• If the WACC is greater than 14%, Project A's IRR will exceed Project B's.

• If the WACC is 9%, Project B's NPV will be higher than Project A's.

Project X's IRR is 19% and Project Y's IRR is 17%. The projects have the same risk and the same

lives, and each has constant cash flows during each year of their lives. If the WACC is 10%, Project Y has a higher NPV than X. Given this information, which of the following statements is CORRECT?

• The crossover rate must be less than 10%.

• The crossover rate must be greater than 10%.

• If the WACC is 8%, Project X will have the higher NPV.

• If the WACC is 18%, Project Y will have the higher NPV.

• Project X is larger in the sense that it has the higher initial cost.

You are on the staff of Camden Inc. The CFO believes project acceptance should be based on the

NPV, but Steve Camden, the president, insists that no project should be accepted unless its IRR

exceeds the project's risk-adjusted WACC. Now you must make a recommendation on a project that

has a cost of $15,000 and two cash flows: $110,000 at the end of Year 1 and -$100,000 at the end of

Year 2. The president and the CFO both agree that the appropriate WACC for this project is 10%. At

10%, the NPV is $2,355.37, but you find two IRRs, one at 6.33% and one at 527%, and a MIRR of

11.32%. Which of the following statements best describes your optimal recommendation, i.e., the

analysis and recommendation that is best for the company and least likely to get you in trouble with

either the CFO or the president?

• You should recommend that the project be rejected because its NPV is negative and its IRR is

  less than the WACC

• You should recommend that the project be rejected because, although its NPV is positive, it has

  an IRR that is less than the WACC

• You should recommend that the project be accepted because (1) its NPV is positive and (2)

  although it has two IRRs, in this case it would be better to focus on the MIRR, which exceeds the

  WACC. You should explain this to the president and tell him that that the firm's value will

  increase if the project is accepted.

• You should recommend that the project be rejected because (1) its NPV is positive and (2) it has

  two IRRs, one of which is less than the WACC, which indicates that the firm's value will decline if

  the project is accepted.

• You should recommend that the project be rejected because, although its NPV is positive, its

  MIRR is less than the WACC, and that indicates that the firm's value will decline if it is accepted.

Projects A and B are mutually exclusive and have normal cash flows. Project A has an IRR of 15% and B's IRR is 20%. The company's WACC is 12%, and at that rate Project A has the higher NPV.

Which of the following statements is CORRECT?

• The crossover rate for the two projects must be less than 12%.

• Assuming the timing pattern of the two projects' cash flows is the same, Project B probably has

  a higher cost (and larger scale).

• Assuming the two projects have the same scale, Project B probably has a faster payback than

  Project A.

• The crossover rate for the two projects must be 12%.

• Since B has the higher IRR, then it must also have the higher NPV if the crossover rate is less

  than the WACC of 12%.

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 project's MIRR is always greater than its regular IRR.

• A project's MIRR is always less than its regular IRR.

• If a project's IRR is greater than its WACC, then the MIRR will be less than the IRR.

• If a project's IRR is greater than its WACC, then the MIRR will be greater than the IRR.

• To find a project's MIRR, we compound cash inflows at the IRR and then discount the terminal

  value back to t = 0 at the WACC.

Nast 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 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.

• $32.12

• $35.33

• $38.87

• $40.15

• $42.16

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?

• $188.68

• $198.61

• $209.07

• $219.52

• $230.49

Masulis Inc. is considering a project that has the following cash flow and WACC data. What is the project's discounted payback?

• 1.61 years

• 1.79 years

• 1.99 years

• 2.22 years

• 2.44 years

Malholtra 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 projected MIRR can be less than the WACC (and even

negative), in which case it will be rejected.

• 14.08%

• 15.65%

• 17.21%

• 18.94%

• 20.83%