Exam 12: Capital Budgeting: Decision Rules

A) For mutually exclusive projects with normal cash flows, the NPV and MIRR methods can never conflict, but their results could conflict with the discounted payback and the regular IRR methods.
B) Multiple IRRs can exist, but not multiple MIRRs. This is one reason some people favor the MIRR over the regular IRR.
C) 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.
D) The percentage difference between the MIRR and the IRR is equal to the project's WACC.
E) The NPV, IRR, MIRR, and discounted payback (using a payback requirement of 3 years or less) methods always lead to the same accept/reject decisions for independent projects.

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A) One drawback of the regular payback for evaluating projects is that this method does not properly account for the time value of money.
B) If a project's payback is positive, then the project should be rejected because it must have a negative NPV.
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 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.
E) The longer a project's payback period, the more desirable the project is normally considered to be by this criterion.

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A) 2.08%
B) 2.31%
C) 2.57%
D) 2.82%
E) 3.10%

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A) $24.14
B) $26.82
C) $29.80
D) $33.11
E) $36.42

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A) 8.86%
B) 9.84%
C) 10.94%
D) 12.15%
E) 13.50%

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A) Assuming the timing pattern of the two projects' cash flows is the same, Project B probably has a higher cost (and larger scale) .
B) Assuming the two projects have the same scale, Project B probably has a faster payback than Project A.
C) The crossover rate for the two projects must be 12%.
D) 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%.
E) The crossover rate for the two projects must be less than 12%.

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A) $5.47
B) $6.02
C) $6.62
D) $7.29
E) $7.82

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A) If the WACC is 6%, Project S will have the higher NPV.
B) If the WACC is 13%, Project S will have the lower NPV.
C) If the WACC is 10%, both projects will have a negative NPV.
D) Project S's NPV is more sensitive to changes in WACC than Project L's.
E) If the WACC is 10%, both projects will have positive NPVs.

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A) 14.08%
B) 15.65%
C) 17.21%
D) 18.94%
E) 20.83%

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A) If Project S has a positive NPV, Project L must also have a positive NPV.
B) If the WACC falls, each project's IRR will increase.
C) If the WACC increases, each project's IRR will decrease.
D) 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.
E) Project S must have a higher NPV than Project L.

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A) If a project has "normal" cash flows, then its MIRR must be positive.
B) If a project has "normal" cash flows, then it will have exactly two real IRRs.
C) The definition of "normal" cash flows is that the cash flow stream has one or more negative cash flows followed by a stream of positive cash flows and then one negative cash flow at the end of the project's life.
D) If a project has "normal" cash flows, then it can have only one real IRR, whereas a project with "nonnormal" cash flows might have more than one real IRR.
E) If a project has "normal" cash flows, then its IRR must be positive.

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A) 1.86 years
B) 2.07 years
C) 2.30 years
D) 2.53 years
E) 2.78 years

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

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