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Assume a project has normal cash flows (that is, the initial

Resolved Question:

Assume a project has normal cash flows (that is, the initial cash flow is negative, and all other cash flows are positive). Which of the following statements is most correct?

a. All else equal, a project's IRR increases as the cost of capital declines.

b. All else equal, a project's NPV increases as the cost of capital declines.

c. All else equal, a project's MIRR is unaffected by changes in the cost of capital.

d. Statements a and b are correct.

e. Statements b and c are correct.

Question 2 7.15 points Save

A major disadvantage of the payback period is that it:

a. is useless as a risk indicator.

b. ignores cash flows beyond the payback period.

c. does not directly account for the time value of money.

d. statements b and c are correct.

e. All of the statements above are correct.

Question 3 7.15 points Save

Projects A and B both have normal cash flows. In other words, there is an up-front cost followed over time by a series of positive cash flows. Both projects have the same risk and a WACC equal to 10 percent. However, Project A has a higher internal rate of return than Project B. Assume that changes in the WACC have no effect on the projects' cash flow levels. Which of the following statements is most correct?

a. Project A must have a higher net present value than Project B.

b. If Project A has a positive NPV, Project B must also have a positive NPV.

c. If Project A's WACC falls, its internal rate of return will increase.

d. If Projects A and B have the same NPV at the current WACC, Project B would have a higher NPV if the WACC of both projects was lower.

e. Statements b and c are correct.

Question 4 7.15 points Save

Cherry Books is considering two mutually exclusive projects. Project A has an internal rate of return of 18 percent, while Project B has an internal rate of return of 30 percent. The two projects have the same risk, the same cost of capital, and the timing of the cash flows is similar. Each has an up-front cost followed by a series of positive cash flows. One of the projects, however, is much larger than the other. If the cost of capital is 16 percent, the two projects have the same net present value (NPV); otherwise, their NPVs are different. Which of the following statements is most correct?

a. If the cost of capital is 12 percent, Project B will have a higher NPV.

b. If the cost of capital is 17 percent, Project B will have a higher NPV.

c. Project B is larger than Project A.

d. Statements a and c are correct.

e. Statements b and c are correct.

Question 5 7.15 points Save

Project A has an internal rate of return (IRR) of 15 percent. Project B has an IRR of 14 percent. Both projects have a cost of capital of 12 percent. Which of the following statements is most correct?

a. Both projects have a positive net present value (NPV).

b. Project A must have a higher NPV than Project B.

c. If the cost of capital were less than 12 percent, Project B would have a higher IRR than Project A.

d. Statements a and c are correct.

e. All of the statements above are correct.

Question 6 7.15 points Save

A project has an up-front cost of $100,000. The project's WACC is 12 percent and its net present value is $10,000. Which of the following statements is most correct?

a. The project should be rejected since its return is less than the WACC.

b. The project's internal rate of return is greater than 12 percent.

c. The project's modified internal rate of return is less than 12 percent.

d. All of the statements above are correct.

e. None of the statements above are correct.

Question 7 7.15 points Save

A proposed project has normal cash flows. In other words, there is an up-front cost followed over time by a series of positive cash flows. The project's internal rate of return is 12 percent and its WACC is 10 percent. Which of the following statements is most correct?

a. The project's NPV is positive.

b. The project's MIRR is greater than 10 percent but less than 12 percent.

c. The project's payback period is greater than its discounted payback period.

d. Statements a and b are correct.

e. All of the statements above are correct.

Question 8 7.15 points Save

Stock C has a beta of 1.2, while Stock D has a beta of 1.6. Assume that the stock market is efficient. Which of the following statements is most correct?

a. The required rates of return of the two stocks should be the same.

b. The expected rates of return of the two stocks should be the same.

c. Each stock should have a required rate of return equal to zero.

d. The NPV of each stock should equal its expected return.

e. The NPV of each stock should equal zero.

Question 9 7.15 points Save

Moynihan Motors has a cost of capital of 10.25 percent. The firm has two normal projects of equal risk. Project A has an internal rate of return of 14 percent, while Project B has an internal rate of return of 12.25 percent. Which of the following statements is most correct?

a. Both projects have a positive net present value.

b. If the projects are mutually exclusive, the firm should always select Project A.

c. If the crossover rate (that is, the rate at which the Project's NPV profiles intersect) is 8 percent, Project A will have a higher net present value than Project B.

d. Statements a and b are correct.

e. Statements a and c are correct.

Question 10 7.15 points Save

Project A has an IRR of 15 percent. Project B has an IRR of 18 percent. Both projects have the same risk. Which of the following statements is most correct?

a. If the WACC is 10 percent, both projects will have a positive NPV, and the NPV of Project B will exceed the NPV of Project A.

b. If the WACC is 15 percent, the NPV of Project B will exceed the NPV of Project A.

c. If the WACC is less than 18 percent, Project B will always have a shorter payback than Project A.

d. If the WACC is greater than 18 percent, Project B will always have a shorter payback than Project A.

e. If the WACC increases, the IRR of both projects will decline.

Question 11 7.15 points Save

The post-audit is used to:

a. improve cash flow forecasts.

b. stimulate management to improve operations and bring results into line with forecasts.

c. eliminate potentially profitable but risky projects.