NPV & IRR multiple choice questions

Answer Options:
No; IRR exceeds the required return
No; IRR is less than the required return
Yes; IRR exceeds the required return
Yes; IRR equals the required return
No; IRR equals the required return

Answer: B — No; IRR is less than the required return

Question: A project has projected cash flows of $127,400, $209,300, and -$46,000 for Years 1 to 3, respectively. The project costs $251,000 and has been assigned a discount rate of 12.5 percent. Should this project be accepted based on the discounting approach to the modified internal rate of return? Why or why not?

Answer Options:
Yes; the MIRR is 11.85 percent
No; the MIRR is 11.33 percent
Yes; the MIRR is 11.33 percent
No; the MIRR is 11.68 percent
No; the MIRR is 11.85 percent

Answer: B — No; the MIRR is 11.33 percent

Question: A project has projected cash flows of -$148,500, $32,800, $64,200, -$7,500 and $87,300 for Years 0 to 4, respectively. Should this project be accepted based on the combination approach to the modified internal rate of return if both the discount rate and the reinvestment rate are 10.5 percent? Why or why not?

Answer Options:
Yes; the MIRR is 8.04 percent
Yes; the MIRR is 9.23 percent
No; the MIRR is 8.04 percent
No; the MIRR is 9.06 percent
No; the MIRR is 9.23 percent

Answer: C — No; the MIRR is 8.04 percent

Question: An investment that provides annual cash flows of $20,100 for 8 years costs $87,500 today. At what rate would you be indifferent between accepting the investment and rejecting it?

Answer Options:
17.60%
15.90%
15.51%
15.93%
16.74%

Answer: D — 15.93%

Question: You are considering two mutually exclusive projects. Project X has cash flows of -$80,000, $20,000, $32,000, and $64,000 for Years 0 to 3, respectively. Project Y has cash flows of -$94,000, $22,000, $41,000, and $72,000 for Years 0 to 3, respectively. Project X has a required return of 9 percent while Project Y’s required return is 11 percent. Should you accept or reject these mutually exclusive projects based on IRR analysis?

Answer Options:
Accept Project X and reject Project Y
Reject Project X and accept Project Y
Accept both projects
Reject both projects
You should not use IRR; use a different method of analysis

Answer: E — You should not use IRR; use a different method of analysis

Question: A new project will provide a net cash inflow of $57,000 in Year 1. The annual cash flows are projected to grow at a rate of 7 percent per year forever. The project requires an initial investment of $739,000 and has a required return of 15.6 percent. The company is somewhat unsure about the growth rate assumption. At what constant rate of growth would the company just break even?

Answer Options:
9.48%
9.29%
7.89%
8.49%
7.75%

Answer: C — 7.89%

Question: Project X costs $47,800 with cash inflows of $34,200 in Year 1 and $28,700 in Year 2. Project Y costs $63,200 with cash inflows of $21,900 in Year 1 and $59,200 in Year 2. These projects are independent and each have an assigned discount rate of 15 percent. Based on the profitability index, what is your recommendation concerning these projects?

Answer Options:
Accept both projects
Reject both projects
Accept Project X and reject Project Y
Accept Project Y and reject Project X
Accept either, but not both projects

Answer: A — Accept both projects

Question: A project has a discount rate of 15.5 percent, an initial cost of $109,200, an inflow of $56,400 in Year 1, and an inflow of $75,900 in Year 2. Your boss requires that every project return a minimum of $1.06 for every $1 invested. Based on this information, what should be your recommendation?

Answer Options:
Accept the project because the PI is .97
Reject the project because the PI is .97
Accept the project because the PI is 1.03
Reject the project because the PI is 1.01
Reject the project because the PI is 1.03

Answer: B — Reject the project because the PI is .97

Question: A independent project has projected cash flows of -$65,000, $46,000, -$2,500, and $53,000 for Years 0 to 3, respectively. Should this project be accepted based on the reinvestment approach to the modified internal rate of return if both the discount rate and the reinvestment rate are 12 percent? Why or why not?

Answer Options:
Yes; the MIRR is 8.04 percent
Yes; the MIRR is 18.41 percent
No; the MIRR is 11.08 percent
No; the MIRR is 8.04 percent
Yes; the MIRR is 14.28 percent

Answer: B — Yes; the MIRR is 18.41 percent

Question: Which capital budgeting method is generally considered the best for evaluating mutually exclusive projects?

Answer Options:
Payback
Average accounting return
Profitability index
Net present value
Internal rate of return

Answer: D — Net present value

Question: Why is the payback method sometimes used for small projects?

Answer Options:
It always maximizes shareholder wealth
It includes all cash flows
Its benefits may outweigh its costs for small decisions
It is more accurate than NPV
It is required by GAAP

Answer: C — Its benefits may outweigh its costs for small decisions