1. FIN 534 Quiz 8
(30 questions with answers) 99,99 % Scored
PLEASE DOWNLOAD HERE
Question 1
Which of the following statements is CORRECT?
Answer
The shorter a project’s payback period, the less desirable the project is normally
considered to be by this criterion.
One drawback of the regular payback is that this method does not take account of
cash flows beyond the payback period.
If a project’s payback is positive, then the project should be accepted because it
must have a positive NPV.
The regular payback ignores cash flows beyond the payback period, but the
discounted payback method overcomes this problem.
One drawback of the discounted payback is that this method does not consider
the time value of money, while the regular payback overcomes this drawback.
2 points
Question 2
Which of the following statements is CORRECT?
Answer
The regular payback method recognizes all cash flows over a project’s life.
The discounted payback method recognizes all cash flows over a project’s life,
and it also adjusts these cash flows to account for the time value of money.
The regular payback method was, years ago, widely used, but virtually no
companies even calculate the payback today.
The regular payback is useful as an indicator of a project’s liquidity because it
gives managers an idea of how long it will take to recover the funds invested in a
project.

2. The regular payback does not consider cash flows beyond the payback year, but
the discounted payback overcomes this defect.
2 points
Question 3
Westchester Corp. is considering two equally risky, mutually exclusive projects,
both of which have normal cash flows. Project A has an IRR of 11%, while Project
B's IRR is 14%. When the WACC is 8%, the projects have the same NPV. Given
this information, which of the following statements is CORRECT?
Answer
If the WACC is 13%, Project A’s NPV will be higher than Project B’s.
If the WACC is 9%, Project A’s NPV will be higher than Project B’s.
If the WACC is 6%, Project B’s NPV will be higher than Project A’s.
If the WACC is greater than 14%, Project A’s IRR will exceed Project B’s.
If the WACC is 9%, Project B’s NPV will be higher than Project A’s.
2 points
Question 4
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
A project’s regular IRR is found by compounding the initial cost at the WACC to
find the terminal value (TV), then discounting the TV at the WACC.
A project’s regular IRR is found by compounding the cash inflows at the WACC to
find the present value (PV), then discounting the TV to find the IRR.
If a project’s IRR is smaller than the WACC, then its NPV will be positive.
A project’s IRR is the discount rate that causes the PV of the inflows to equal the
project’s cost.
If a project’s IRR is positive, then its NPV must also be positive.
2 points

3. Question 5
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
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.
A project’s regular 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.
If a project’s IRR is greater than the WACC, then its NPV must be negative.
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.
To find a project’s IRR, we must find a discount rate that is equal to the WACC.
2 points
Question 6
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
A project’s NPV is found by compounding the cash inflows at the IRR to find the
terminal value (TV), then discounting the TV at the WACC.
The lower the WACC used to calculate a project’s NPV, the lower the calculated
NPV will be.
If a project’s NPV is less than zero, then its IRR must be less than the WACC.
If a project’s NPV is greater than zero, then its IRR must be less than zero.
The NPV of a relatively low-risk project should be found using a relatively high
WACC.
2 points
Question 7

4. Which of the following statements is CORRECT?
Answer
The IRR method appeals to some managers because it gives an estimate of the
rate of return on projects rather than a dollar amount, which the NPV method
provides.
The discounted payback method eliminates all of the problems associated with
the payback method.
When evaluating independent projects, the NPV and IRR methods often yield
conflicting results regarding a project's acceptability.
To find the MIRR, we discount the TV at the IRR.
A project’s NPV profile must intersect the X-axis at the project’s WACC.
2 points
Question 8
Which of the following statements is CORRECT?
Answer
The NPV method assumes that cash flows will be reinvested at the WACC, while
the IRR method assumes reinvestment at the IRR.
The NPV method assumes that cash flows will be reinvested at the risk-free rate,
while the IRR method assumes reinvestment at the IRR.
The NPV method assumes that cash flows will be reinvested at the WACC, while
the IRR method assumes reinvestment at the risk-free rate.
The NPV method does not consider all relevant cash flows, particularly cash
flows beyond the payback period.
The IRR method does not consider all relevant cash flows, particularly cash flows
beyond the payback period.
2 points
Question 9
Projects S and L both have an initial cost of $10,000, followed by a series of
positive cash inflows. Project S’s undiscounted net cash flows total $20,000, while
L’s total undiscounted flows are $30,000. At a WACC of 10%, the two projects

5. have identical NPVs. Which project’s NPV is more sensitive to changes in the
WACC?
Answer
Project S.
Project L.
Both projects are equally sensitive to changes in the WACC since their NPVs are
equal at all costs of capital.
Neither project is sensitive to changes in the discount rate, since both have NPV
profiles that are horizontal.
The solution cannot be determined because the problem gives us no information
that can be used to determine the projects’ relative IRRs.
2 points
Question 10
Projects C and D are mutually exclusive and have normal cash flows. 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?
Answer
Project D probably has a higher IRR.
Project D is probably larger in scale than Project C.
Project C probably has a faster payback.
Project C probably has a higher IRR.
The crossover rate between the two projects is below 12%.
2 points
Question 11
Which of the following statements is CORRECT?
Answer

6. For a project with normal cash flows, any change in the WACC will change both
the NPV and the IRR.
To find the MIRR, we first compound cash flows at the regular IRR to find the TV,
and then we discount the TV at the WACC to find the PV.
The NPV and IRR methods both assume that cash flows can be reinvested at the
WACC. However, the MIRR method assumes reinvestment at the MIRR itself.
If two projects have the same cost, and if their NPV profiles cross in the upper
right quadrant, then the project with the higher IRR probably has more of its cash
flows coming in the later years.
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.
2 points
Question 12
Which of the following statements is CORRECT?
Answer
The MIRR and NPV decision criteria can never conflict.
The IRR method can never be subject to the multiple IRR problem, while the
MIRR method can be.
One reason some people prefer the MIRR to the regular IRR is that the MIRR is
based on a generally more reasonable reinvestment rate assumption.
The higher the WACC, the shorter the discounted payback period.
The MIRR method assumes that cash flows are reinvested at the crossover rate.
2 points
Question 13
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

7. affected by the change in economic conditions. Under these conditions, which of
the following statements is CORRECT?
Answer
You should reject both projects because they will both have negative NPVs under
the new conditions.
You should delay a decision until you have more information on the projects,
even if this means that a competitor might come in and capture this market.
You should recommend Project L, because at the new WACC it will have the
higher NPV.
You should recommend Project S, because at the new WACC it will have the
higher NPV.
You should recommend Project S because it has the higher IRR and will continue
to have the higher IRR even at the new WACC.
2 points
Question 14
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
The longer a project’s payback period, the more desirable the project is normally
considered to be by this criterion.
One drawback of the regular payback for evaluating projects is that this method
does not properly account for the time value of money.
If a project’s payback is positive, then the project should be rejected because it
must have a negative NPV.
The regular payback ignores cash flows beyond the payback period, but the
discounted payback method overcomes this problem.
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.
2 points

8. Question 15
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
If Project A has a higher IRR than Project B, then Project A must have the lower
NPV.
If Project A has a higher IRR than Project B, then Project A must also have a
higher NPV.
The IRR calculation implicitly assumes that all cash flows are reinvested at the
WACC.
The IRR calculation implicitly assumes that cash flows are withdrawn from the
business rather than being reinvested in the business.
If a project has normal cash flows and its IRR exceeds its WACC, then the
project’s NPV must be positive.
2 points
Question 16
Which of the following should be considered when a company estimates the cash
flows used to analyze a proposed project?
Answer
The new project is expected to reduce sales of one of the company’s existing
products by 5%.
Since the firm’s director of capital budgeting spent some of her time last year to
evaluate the new project, a portion of her salary for that year should be charged
to the project’s initial cost.
The company has spent and expensed $1 million on R&D associated with the
new project.
The company spent and expensed $10 million on a marketing study before its
current analysis regarding whether to accept or reject the project.
The firm would borrow all the money used to finance the new project, and the
interest on this debt would be $1.5 million per year.

9. 2 points
Question 17
Which of the following statements is CORRECT?
Answer
Sensitivity analysis is a good way to measure market risk because it explicitly
takes into account diversification effects.
One advantage of sensitivity analysis relative to scenario analysis is that it
explicitly takes into account the probability of specific effects occurring, whereas
scenario analysis cannot account for probabilities.
Well-diversified stockholders do not need to consider market risk when
determining required rates of return.
Market risk is important, but it does not have a direct effect on stock prices
because it only affects beta.
Simulation analysis is a computerized version of scenario analysis where input
variables are selected randomly on the basis of their probability distributions.
2 points
Question 18
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
Increase the estimated IRR of the project to reflect its greater risk.
Increase the estimated NPV of the project to reflect its greater risk.
Reject the project, since its acceptance would increase the firm’s risk.
Ignore the risk differential if the project would amount to only a small fraction of
the firm’s total assets.
Increase the cost of capital used to evaluate the project to reflect its higher-than-
average risk.
2 points

10. Question 19
Which of the following statements is CORRECT?
Answer
If a firm is found guilty of cannibalization in a court of law, then it is judged to have
taken unfair advantage of its competitors. Thus, cannibalization is dealt with by
society through the antitrust laws.
If a firm is found guilty of cannibalization in a court of law, then it is judged to have
taken unfair advantage of its customers. Thus, cannibalization is dealt with by
society through the antitrust laws.
If cannibalization exists, then the cash flows associated with the project must be
increased to offset these effects. Otherwise, the calculated NPV will be biased
downward.
If cannibalization is determined to exist, then this means that the calculated NPV
if cannibalization is considered will be higher than the NPV if this effect is not
recognized.
Cannibalization, as described in the text, is a type of externality that is not against
the law, and any harm it causes is done to the firm itself.
2 points
Question 20
The relative risk of a proposed project is best accounted for by which of the
following procedures?
Answer
Adjusting the discount rate upward if the project is judged to have above-average
risk.
Adjusting the discount rate downward if the project is judged to have above-
average risk.
Reducing the NPV by 10% for risky projects.
Picking a risk factor equal to the average discount rate.
Ignoring risk because project risk cannot be measured accurately.
2 points

11. Question 21
Which of the following statements is CORRECT?
Answer
An externality is a situation where a project would have an adverse effect on
some other part of the firm’s overall operations. If the project would have a
favorable effect on other operations, then this is not
an externality.
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.
The NPV method automatically deals correctly with externalities, even if the
externalities are not specifically identified, but the IRR method does not. This is
another reason to favor the NPV.
Both the NPV and IRR methods deal correctly with externalities, even if the
externalities are not specifically identified. However, the payback method does
not.
Identifying an externality can never lead to an increase in the calculated NPV.
2 points
Question 22
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
A firm has a parcel of land that can be used for a new plant site or be sold,
rented, or used for agricultural purposes.
A new product will generate new sales, but some of those new sales will be from
customers who switch from one of the firm’s current products.
A firm must obtain new equipment for the project, and $1 million is required for
shipping and installing the new machinery.
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.

12. A firm can produce a new product, and the existence of that product will stimulate
sales of some of the firm’s other products.
2 points
Question 23
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
All sunk costs that have been incurred relating to the project.
All interest expenses on debt used to help finance the project.
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.
Sunk costs that have been incurred relating to the project, but only if those costs
were incurred prior to the current year.
Effects of the project on other divisions of the firm, but only if those effects lower
the project’s own direct cash flows.
2 points
Question 24
Which of the following is NOT a relevant cash flow and thus should not be
reflected in the analysis of a capital budgeting project?
Answer
Changes in net working capital.
Shipping and installation costs.
Cannibalization effects.
Opportunity costs.
Sunk costs that have been expensed for tax purposes.

13. 2 points
Question 25
Which of the following statements is CORRECT?
Answer
Since depreciation is not a cash expense, and since cash flows and not
accounting income are the relevant input, depreciation plays no role in capital
budgeting.
Under current laws and regulations, corporations must use straight-line
depreciation for all assets whose lives are 3 years or longer.
If firms use accelerated depreciation, they will write off assets slower than they
would under straight-line depreciation, and as a result projects’ forecasted NPVs
are normally lower than they would be if straight-line depreciation were required
for tax purposes.
If they use accelerated depreciation, firms can write off assets faster than they
could under straight-line depreciation, and as a result projects’ forecasted NPVs
are normally lower than they would be if straight-line depreciation were required
for tax purposes.
If they use accelerated depreciation, firms can write off assets faster than they
could under straight-line depreciation, and as a result projects’ forecasted NPVs
are normally higher than they would be if straight-line depreciation were required
for tax purposes.
2 points
Question 26
Which of the following statements is CORRECT?
Answer
In a capital budgeting analysis where part of the funds used to finance the project
would be raised as debt, failure to include interest expense as a cost when
determining the project’s cash flows will lead to an upward bias in the NPV.
In a capital budgeting analysis where part of the funds used to finance the project
would be raised as debt, failure to include interest expense as a cost when
determining the project’s cash flows will lead to a downward bias in the NPV.
The existence of any type of “externality” will reduce the calculated NPV versus
the NPV that would exist without the externality.

14. 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.
If one of the assets to be used by a potential project is already owned by the firm
but is not being used, then any costs associated with that asset is a sunk cost
and should be ignored.
2 points
Question 27
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
A and B.
A, B, and C.
A, B, and D.
A, B, C, and D.
A, B, C, D, and E.
2 points
Question 28

15. Which of the following statements is CORRECT?
Answer
A sunk cost is any cost that must be expended in order to complete a project and
bring it into operation.
A sunk cost is any cost that was expended in the past but can be recovered if the
firm decides not to go forward with the project.
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.
Sunk costs were formerly hard to deal with but now that the NPV method is
widely used, it is possible to simply include sunk costs in the cash flows and then
calculate the PV of the project.
A good example of a sunk cost is a situation where Home Depot opens a new
store, and that leads to a decline in sales of one of the firm’s existing stores.
2 points
Question 29
Rowell Company spent $3 million two years ago to build a plant for a new
product. It then decided not to go forward with the project, so the building is
available for sale or for a new product. Rowell owns the building free and clear--
there is no mortgage on it. Which of the following statements is CORRECT?
Answer
Since the building has been paid for, it can be used by another project with no
additional cost. Therefore, it should not be reflected in the cash flows for any new
project.
If the building could be sold, then the after-tax proceeds that would be generated
by any such sale should be charged as a cost to any new project that would use
it.
This is an example of an externality, because the very existence of the building
affects the cash flows for any new project that Rowell might consider.
Since the building was built in the past, its cost is a sunk cost and thus need not
be considered when new projects are being evaluated, even if it would be used
by those new projects.
If there is a mortgage loan on the building, then the interest on that loan would
have to be charged to any new project that used the building.

16. 2 points
Question 30
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
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.
Revenues from an existing product would be lost as a result of customers
switching to the new product.
Shipping and installation costs associated with a machine that would be used to
produce the new product.
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.
It is learned that land the company owns and would use for the new project, if it is
accepted, could be sold to another firm.