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[61].Which of the following statements CORRECT? a.One advantage of the NPV

Question : [61].Which of the following statements CORRECT? a.One advantage of the NPV : 1416405

 

[61].Which of the following statements is CORRECT?

 

a.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.

b.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.

c.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.

d.One advantage of the NPV over the MIRR method is that NPV discounts cash flows whereas the MIRR is based on undiscounted cash flows.

e.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.

 

[62].Which of the following statements is CORRECT?

 

a.The IRR method appeals to some managers because it gives an estimate of the rate of return on projects rather than a dollar amount, which the NPV method provides.

b.The discounted payback method eliminates all of the problems associated with the payback method.

c.When evaluating independent projects, the NPV and IRR methods often yield conflicting results regarding a project's acceptability.

d.To find the MIRR, we discount the TV at the IRR.

e.A project’s NPV profile must intersect the X-axis at the project’s WACC.

 

[63].Projects S and L are equally risky, mutually exclusive, and have normal cash flows.  Project S has an IRR of 15%, while Project L’s IRR is 12%.  The two projects have the same NPV when the WACC is 7%.  Which of the following statements is CORRECT?

 

a.If the WACC is 10%, both projects will have positive NPVs.

b.If the WACC is 6%, Project S will have the higher NPV.

c.If the WACC is 13%, Project S will have the lower NPV.

d.If the WACC is 10%, both projects will have a negative NPV.

e.Project S’s NPV is more sensitive to changes in WACC than Project L's.

 

[64].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?

 

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

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

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

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

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

 

[65].You are considering two mutually exclusive, equally risky, projects.  Both have IRRs that exceed the WACC.  Which of the following statements is CORRECT?  Assume that the projects have normal cash flows, with one outflow followed by a series of inflows.

 

a.If the two projects' NPV profiles do not cross, then there will be a sharp conflict as to which one should be selected.

b.If the cost of capital is greater than the crossover rate, then the IRR and the NPV criteria will not result in a conflict between the projects.  One project will rank higher by both criteria.

c.If the cost of capital is less than the crossover rate, then the IRR and the NPV criteria will not result in a conflict between the projects.  One project will rank higher by both criteria.

d.For a conflict to exist between NPV and IRR, the initial investment cost of one project must exceed the cost of the other.

e.For a conflict to exist between NPV and IRR, one project must have an increasing stream of cash flows over time while the other has a decreasing stream.  If both sets of cash flows are increasing or decreasing, then it would be impossible for a conflict to exist, even if one project is larger than the other.

 

[66].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?

 

a.The crossover rate must be less than 10%.

b.The crossover rate must be greater than 10%.

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

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

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

 

[67].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?

 

a.You should recommend that the project be rejected because its NPV is negative and its IRR is less than the WACC.

b.You should recommend that the project be rejected because, although its NPV is positive, it has an IRR that is less than the WACC.

c.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.

d.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.

e.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.

 

[68].Which of the following statements is CORRECT?  Assume that the project being considered has normal cash flows, with one cash outflow at t = 0 followed by a series of positive cash flows.

 

a.A project’s MIRR is always greater than its regular IRR.

b.A project’s MIRR is always less than its regular IRR.

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

d.To find a project’s MIRR, we compound cash inflows at the regular IRR and then find the discount rate that causes the PV of the terminal value to equal the initial cost.

e.To find a project’s MIRR, the textbook procedure compounds cash inflows at the WACC and then finds the discount rate that causes the PV of the terminal value to equal the initial cost.

 

[69].Projects S and L both have normal cash flows, and the projects have the same risk, hence both are evaluated with the same WACC, 10%.  However, S has a higher IRR than L.  Which of the following statements is CORRECT?

 

a.Project S must have a higher NPV than Project L.

b.If Project S has a positive NPV, Project L must also have a positive NPV.

c.If the WACC falls, each project’s IRR will increase.

d.If the WACC increases, each project’s IRR will decrease.

e.If Projects S and L have the same NPV at the current WACC, 10%, then Project L, the one with the lower IRR, would have a higher NPV if the WACC used to evaluate the projects declined.

[70].Which of the following statements is CORRECT?  Assume that all projects being considered have normal cash flows and are equally risky.

 

a.If a project’s IRR is equal to its WACC, then, under all reasonable conditions, the project’s NPV must be negative.

b.If a project’s IRR is equal to its WACC, then under all reasonable conditions, the project’s IRR must be negative.

c.If a project’s IRR is equal to its WACC, then under all reasonable conditions the project’s NPV must be zero.

d.There is no necessary relationship between a project’s IRR, its WACC, and its NPV.

e.When evaluating mutually exclusive projects, those projects with relatively long lives will tend to have relatively high NPVs when the cost of capital is relatively high.

 

 

 

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