Net Present Value and Correct Answer

Question 1 2 out of 2 points | | | Assume that the economy is in a mild recession, and as a result interest rates and money costs generally are relatively low. The WACC for two mutually exclusive projects that are being considered is 8%. Project S has an IRR of 20% while Project L’s IRR is 15%. The projects have the same NPV at the 8% current WACC. However, you believe that the economy is about to recover, and money costs and thus your WACC will also increase. You also think that the projects will not be funded until the WACC has increased, and their cash flows will not be affected by the change in economic conditions.
Under these conditions, which of the following statements is CORRECT? Answer | | | | | Selected Answer:| You should recommend Project S, because at the new WACC it will have the higher NPV. | Correct Answer:| You should recommend Project S, because at the new WACC it will have the higher NPV. | | | | | Question 2 2 out of 2 points | | | Which of the following statements is CORRECT? Answer | | | | | Selected Answer:| Multiple IRRs can occur only if the signs of the cash flows change more than once. | Correct Answer:| Multiple IRRs can occur only if the signs of the cash flows change more than once. | | | | Question 3 2 out of 2 points | | | Which of the following statements is CORRECT? Answer | | | | | Selected Answer:| 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. | Correct Answer:| 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. | | | | Question 4 2 out of 2 points | | | Which of the following statements is CORRECT? Answer | | | | | Selected Answer:| 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. | Correct Answer:| 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. | | | | | Question 5 2 out of 2 points | | | 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. Answer | | | | | Selected Answer:| If a project has normal cash flows and its IRR exceeds its WACC, then the project’s NPV must be positive. | Correct Answer:| If a project has normal cash flows and its IRR exceeds its WACC, then the project’s NPV must be positive. | | | | | Question 6 2 out of 2 points | | | 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?
Answer | | | | | Selected Answer:| You should recommend Project L, because at the new WACC it will have the higher NPV. | Correct Answer:| You should recommend Project L, because at the new WACC it will have the higher NPV. | | | | | Question 7 2 out of 2 points | | | 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. Answer | | | | | Selected Answer:| The higher the WACC used to calculate the NPV, the lower the calculated NPV will be. Correct Answer:| The higher the WACC used to calculate the NPV, the lower the calculated NPV will be. | | | | | Question 8 2 out of 2 points | | | Which of the following statements is CORRECT? Answer | | | | | Selected Answer:| 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. | Correct Answer:| 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. | | | | Question 9 2 out of 2 points | | | Which of the following statements is CORRECT? Answer | | | | | Selected Answer:| If two projects have the same cost, and if their NPV profiles cross in the upper right quadrant, then the project with the lower IRR probably has more of its cash flows coming in the later years. | Correct Answer:| If two projects have the same cost, and if their NPV profiles cross in the upper right quadrant, then the project with the lower IRR probably has more of its cash flows coming in the later years. | | | | Question 10 2 out of 2 points | | | 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. Answer | | | | | Selected Answer:| If a project’s NPV is less than zero, then its IRR must be less than the WACC. | Correct Answer:| If a project’s NPV is less than zero, then its IRR must be less than the WACC. | | | | | Question 11 2 out of 2 points | | | Which of the following statements is CORRECT?
Answer | | | | | Selected Answer:| The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the IRR. | Correct Answer:| The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the IRR. | | | | | Question 12 0 out of 2 points | | | 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.
Answer | | | | | Selected Answer:| If a company uses the same payback requirement to evaluate all projects, say it requires a payback of 4 years or less, then the company will tend to reject projects with relatively short lives and accept long-lived projects, and this will cause its risk to increase over time. | Correct Answer:| One drawback of the regular payback for evaluating projects is that this method does not properly account for the time value of money. | | | | | Question 13 2 out of 2 points | | | 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. Answer | | | | | Selected Answer:| A project’s IRR is the discount rate that causes the PV of the inflows to equal the project’s cost. | Correct Answer:| A project’s IRR is the discount rate that causes the PV of the inflows to equal the project’s cost. | | | | | Question 14 2 out of 2 points | | | Which of the following statements is CORRECT? Answer | | | | | Selected Answer:| Projects with “normal” cash flows can have only one real IRR. Correct Answer:| Projects with “normal” cash flows can have only one real IRR. | | | | | Question 15 0 out of 2 points | | | Which of the following statements is CORRECT? Answer | | | | | Selected Answer:| 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. | Correct Answer:| Multiple IRRs can exist, but not multiple MIRRs. This is one reason some people favor the MIRR over the regular IRR. | | | | | Question 16 0 out of 2 points | | When evaluating a new project, firms should include in the projected cash flows all of the following EXCEPT:Answer | | | | | Selected Answer:| The salvage value of assets used for the project that will be recovered at the end of the project’s life. | Correct Answer:| Previous expenditures associated with a market test to determine the feasibility of the project, provided those costs have been expensed for tax purposes. | | | | | Question 17 2 out of 2 points | | | A firm is considering a new project whose risk is greater than the risk of the firm’s average project, based on all methods for assessing risk.
In evaluating this project, it would be reasonable for management to do which of the following? Answer | | | | | Selected Answer:| Increase the cost of capital used to evaluate the project to reflect its higher-than-average risk. | Correct Answer:| Increase the cost of capital used to evaluate the project to reflect its higher-than-average risk. | | | | | Question 18 2 out of 2 points | | | Which of the following statements is CORRECT? Answer | | | | | Selected Answer:| A sunk cost is a cost that was incurred and expensed in the past and cannot be recovered if the firm decides not to go forward with the project. Correct Answer:| A sunk cost is a cost that was incurred and expensed in the past and cannot be recovered if the firm decides not to go forward with the project. | | | | | Question 19 2 out of 2 points | | | Which of the following statements is CORRECT? Answer | | | | | Selected Answer:| An example of an externality is a situation where a bank opens a new office, and that new office causes deposits in the bank’s other offices to increase. | Correct Answer:| An example of an externality is a situation where a bank opens a new office, and that new office causes deposits in the bank’s other offices to increase. | | | | Question 20 2 out of 2 points | | | Which of the following statements is CORRECT? Answer | | | | | Selected Answer:| Simulation analysis is a computerized version of scenario analysis where input variables are selected randomly on the basis of their probability distributions. | Correct Answer:| Simulation analysis is a computerized version of scenario analysis where input variables are selected randomly on the basis of their probability distributions. | | | | | Question 21 0 out of 2 points | | | Which of the following statements is CORRECT?
Answer | | | | | Selected Answer:| The existence of any type of “externality” will reduce the calculated NPV versus the NPV that would exist without the externality. | Correct Answer:| If one of the assets to be used by a potential project is already owned by the firm, and if that asset could be sold or leased to another firm if the new project were not undertaken, then the net after-tax proceeds that could be obtained should be charged as a cost to the project under consideration. | | | | | Question 22 2 out of 2 points | | | A company is considering a new project.
The CFO plans to calculate the project’s NPV by estimating the relevant cash flows for each year of the project’s life (i. e. , the initial investment cost, the annual operating cash flows, and the terminal cash flow), then discounting those cash flows at the company’s overall WACC. Which one of the following factors should the CFO be sure to INCLUDE in the cash flows when estimating the relevant cash flows? Answer | | | | | Selected Answer:| The investment in working capital required to operate the project, even if that investment will be recovered at the end of the project’s life. Correct Answer:| The investment in working capital required to operate the project, even if that investment will be recovered at the end of the project’s life. | | | | | Question 23 0 out of 2 points | | | Which of the following statements is CORRECT? Answer | | | | | Selected Answer:| Using accelerated depreciation rather than straight line normally has no effect on a project’s total projected cash flows nor would it affect the timing of those cash flows or the resulting NPV of the project. Correct Answer:| Using accelerated depreciation rather than straight line normally has the effect of speeding up cash flows and thus increasing a project’s forecasted NPV. | | | | | Question 24 0 out of 2 points | | | Which of the following rules is CORRECT for capital budgeting analysis? Answer | | | | | Selected Answer:| If a product is competitive with some of the firm’s other products, this fact should be incorporated into the estimate of the relevant cash flows. However, if the new product is complementary to some of the firm’s other products, this fact need not be reflected in the analysis. Correct Answer:| Only incremental cash flows, which are the cash flows that would result if a project is accepted, are relevant when making accept/reject decisions. | | | | | Question 25 0 out of 2 points | | | Which one of the following would NOT result in incremental cash flows and thus should NOT be included in the capital budgeting analysis for a new product? Answer | | | | | Selected Answer:| Using some of the firm’s high-quality factory floor space that is currently unused to produce the proposed new product.
This space could be used for other products if it is not used for the project under consideration. | Correct Answer:| The cost of a study relating to the market for the new product that was completed last year. The results of this research were positive, and they led to the tentative decision to go ahead with the new product. The cost of the research was incurred and expensed for tax purposes last year. | | | | | Question 26 2 out of 2 points | | | The relative risk of a proposed project is best accounted for by which of the following procedures?
Answer | | | | | Selected Answer:| Adjusting the discount rate upward if the project is judged to have above-average risk. | Correct Answer:| Adjusting the discount rate upward if the project is judged to have above-average risk. | | | | | Question 27 2 out of 2 points | | | Dalrymple Inc. is considering production of a new product. In evaluating whether to go ahead with the project, which of the following items should NOT be explicitly considered when cash flows are estimated?
Answer | | | | | Selected Answer:| The company has spent and expensed for tax purposes $3 million on research related to the new detergent. These funds cannot be recovered, but the research may benefit other projects that might be proposed in the future. | Correct Answer:| The company has spent and expensed for tax purposes $3 million on research related to the new detergent. These funds cannot be recovered, but the research may benefit other projects that might be proposed in the future. | | | | | Question 28 2 out of 2 points | | Which of the following should be considered when a company estimates the cash flows used to analyze a proposed project? Answer | | | | | Selected Answer:| The new project is expected to reduce sales of one of the company’s existing products by 5%. | Correct Answer:| The new project is expected to reduce sales of one of the company’s existing products by 5%. | | | | | Question 29 2 out of 2 points | | | Langston Labs has an overall (composite) WACC of 10%, which reflects the cost of capital for its average asset.
Its assets vary widely in risk, and Langston evaluates low-risk projects with a WACC of 8%, average-risk projects at 10%, and high-risk projects at 12%. The company is considering the following projects: Project Risk Expected Return A High 15% B Average 12% C High 11% D Low 9% E Low 6% Which set of projects would maximize shareholder wealth? Answer | | | | | Selected Answer:| A, B, and D. | Correct Answer:| A, B, and D. | | | | | Question 30 2 out of 2 points | | | Which one of the following would NOT result in incremental cash flows and thus should NOT be included in the capital budgeting analysis for a new product?
Answer | | | | | Selected Answer:| A firm has spent $2 million on R&D associated with a new product. These costs have been expensed for tax purposes, and they cannot be recovered regardless of whether the new project is accepted or rejected. | Correct Answer:| A firm has spent $2 million on R&D associated with a new product. These costs have been expensed for tax purposes, and they cannot be recovered regardless of whether the new project is accepted or rejected. | | | | | Thursday, November 17, 2011 11:33:19 PM EST OK

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