Can you help with these questions?? This is for a Finance class

Finance 3090, HW7

Name: __________________________

1. If you are evaluating a normal, independent project, then you should accept the project as long as

____________.

a)

b)

c)

d)

The IRR is positive

The Payback Period exists

The Modified IRR is greater than the IRR

The Discounted Payback Period exists

Use the following information for questions 2 and 3: Project S has cash flows of (600), 400, 300. Project L has

cash flows of (900), 300, 400, 500. Both projects have a required return of 8%. The projects are mutually

exclusive and repeatable.

2. What is the Equivalent Annual Annuity of Project S?

a) 9.73

b) 15.46

c) 21.17

d) 27.57

3. What is the 6-yr NPV of Project L using the Replacement Chain approach?

a) 73

4.

b) 118

c) 174

d) 211

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. The longer a project?s payback period, the more desirable the project is normally considered to be

by this criterion.

b. One drawback of the payback criterion for evaluating projects is that this method does not

properly account for the time value of money.

c. The regular payback ignores cash flows beyond the payback period, but the discounted payback

method overcomes this problem.

d. If a company uses the same 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.

5. For independent projects with normal cash flows, the NPV, Discounted Payback and IRR methods will

always lead to the same accept or reject decision.

a) True

b) False

6. Net Present Value is considered a better method than Internal Rate of Return because __________.

a)

b)

c)

d)

NPV is directly related to maximizing shareholder wealth

Nonnormal projects may have multiple NPVs

NPV method assumes that cash flows are reinvested at the projects expected return

All of these are reasons why NPV is considered better

7. Which of the following is true for normal projects if the WACC is positive?

a)

b)

c)

d)

8.

If a project's IRR is positive, then its NPV will always be positive

If a project's NPV is negative, then its Profitability Index will always be negative

If a project's NPV is positive, then its IRR will always be positive

None of the above are true

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 cash inflows at the WACC to find the

terminal value (TV), then discounting this TV at the WACC.

b. A project?s modified IRR is found by discounting the cash inflows at the WACC to find the

present value (PV), then compounding this PV to find the IRR.

c. If a project?s IRR is greater than the WACC, then its NPV must be negative.

d. To find a project?s IRR, we must solve for the discount rate that causes the PV of the inflows to

equal the PV of the project?s costs.

9.

Which of the following statements is CORRECT?

a. The IRR method assumes that cash flows will be reinvested at the WACC, while the NPV method

assumes reinvestment at the projects expected return.

b. The Profitability Index method assumes that cash flows will be reinvested at the risk-free rate,

while the Modified IRR method assumes reinvestment at the IRR.

c. The Discounted Payback Period method assumes that cash flows will be reinvested at the WACC,

while the IRR method assumes reinvestment at the risk-free rate.

d. The Payback Period method does not consider all relevant cash flows, particularly, cash flows

beyond the payback period.

10.

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.

b.

c.

d.

If Project A has a higher IRR than Project B, then Project A must have the higher NPV.

The crossover rate is the required return where two projects have the same NPV.

The IRR calculation implicitly assumes that all cash flows are reinvested at the WACC.

If a project has normal cash flows and its IRR exceeds its WACC, then the project?s NPV must be

negative.

USE THE FOLLOWING PROJECT CASH FLOWS FOR QUESTIONS 11-16:

Project A

(20,000)

10,000

5,000

2,500

2,000

1,000

500

Today

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Project B

(30,000)

2,000

4,000

6,000

8,000

10,000

12,000

Project C

(8,000)

1,000

2,000

3,000

4,000

5,000

Project D

(3,000)

2,000

2,000

2,000

2,000

2,000

(6,000)

11. What is the Modified IRR of Project D if the cost of capital is 9%?

a) 8.18%

b) 12.7%

c) 24.2%

d) 48.3%

12. What is the Net Present Value of project E if the cost of capital is 12%?

b) $0

b) $500

c) $1,000

d) $1,500

13. What is the IRR of project A if the cost of capital is 6%?

a)

b)

c)

d)

0%

2.4%

8.25%

19.53%

14. What is Project A?s Profitability Index if the cost of capital is 6%?

a)

.933

b) 1.02

c) 1.067

d) 1.091

c) 4.5 years

d) 5 years

15. What is Project B?s Payback Period?

a) 3.5 years

b) 4 years

16. What is the Crossover Rate between Project B and C?

a)

b)

c)

d)

4.5%

8.25%

12.5%

18.8%

Project E

(6,000)

750

1,500

2,250

3,000

3,750

17.

Which of the following statements is CORRECT?

a.

b.

c.

d.

18.

Projects C and D are mutually exclusive and have normal cash flows. If the WACC is 12%, then they

both have an NPV of -$1,000, but Project C has a higher NPV if the WACC is less than 12%, whereas

Project D has a higher NPV if the WACC exceeds 12%. Which of the following statements is

CORRECT?

a.

b.

c.

d.

19.

For a project to have more than one IRR, then both IRRs must be greater than the WACC.

If two projects are mutually exclusive, then they are likely to have multiple IRRs.

Multiple IRRs can only occur if the signs of the cash flows change more than once.

If a project is independent, then it cannot have multiple IRRs.

Project D has a higher IRR.

Project D is probably larger in scale than Project C.

Project C has a higher IRR.

The crossover rate between the two projects is below 12%.

Projects S and L are equally risky, mutually exclusive projects with 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.

b.

c.

d.

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

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

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

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

20. The ___________________ is used as the ______________ for projects of average risk.

a)

b)

c)

d)

IRR; Required Return

Risk Adjusted Discount Rate; Expected Return

Modified IRR; Expected Return

WACC; Required Return