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FINC 302 - Final - CH. 11
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Terms in this set (10)
a.
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.
Which of the following statements is CORRECT?
a.
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.
b.
The discounted payback method eliminates all of the problems associated with the payback method.
c.
When evaluating independent projects, the NPV and IRR methods often yield conflicting results regarding a project's acceptability.
d.
To find the MIRR, we discount the TV (terminal value) at the IRR.
e.
A project's NPV profile must intersect the X-axis at the project's WACC.
e.
One defect of the IRR method versus the NPV is that the IRR does not take proper account of differences in the sizes of projects.
Which of the following statements is CORRECT?
a.
One defect of the IRR method versus the NPV is that the IRR does not take account of cash flows over a project's full life.
b.
One defect of the IRR method versus the NPV is that the IRR does not take account of the time value of money.
c.
One defect of the IRR method versus the NPV is that the IRR does not take account of the cost of capital.
d.
One defect of the IRR method versus the NPV is that the IRR values a dollar received today the same as a dollar that will not be received until sometime in the future.
e.
One defect of the IRR method versus the NPV is that the IRR does not take proper account of differences in the sizes of projects.
b.
One drawback of the payback criterion is that this method does not take account of cash flows beyond the payback period.
Which of the following statements is CORRECT?
a.
The shorter a project's payback period, the less desirable the project is normally considered to be by this criterion.
b.
One drawback of the payback criterion is that this method does not take account of cash flows beyond the payback period.
c.
If a project's payback is positive, then the project should be accepted because it must have a positive NPV.
d.
The regular payback ignores cash flows beyond the payback period, but the discounted payback method overcomes this problem.
e.
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.
d.
$221.86
Anderson Systems is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that if a project's projected NPV is negative, it should be rejected.
WACC:
11.00%
Year
0
1
2
3
Cash flows
-$1,000
$500
$500
$500
a.
$259.57
b.
$257.35
c.
$241.82
d.
$221.86
e.
$195.23
b.
-$132.63
Cornell Enterprises is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that a project's projected NPV can be negative, in which case it will be rejected.
WACC:
10.00%
Year
0
1
2
3
Cash flows
-$1,275
$450
$460
$470
a.
-$106.10
b.
-$132.63
c.
-$139.26
d.
-$125.99
e.
-$165.78
e.
29.94%
Simkins Renovations Inc. is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's projected IRR can be less than the WACC (and even negative), in which case it will be rejected.
Year
0
1
2
3
4
Cash flows
-$625
$300
$290
$280
$270
a.
29.04%
b.
32.63%
c.
24.55%
d.
30.83%
e.
29.94%
b.
$186.47
A firm is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. The CEO wants to use the IRR criterion, while the CFO favors the NPV method. You were hired to advise the firm on the best procedure. If the wrong decision criterion is used, how much potential value would the firm lose?
WACC:
6.75%
0
1
2
3
4
CFS
-$1,025
$380
$380
$380
$380
CFL
-$2,150
$765
$765
$765
$765
a.
$214.44
b.
$186.47
c.
$218.17
d.
$182.74
e.
$220.03
d.
1.47 years
Fernando Designs is considering a project that has the following cash flow and WACC data. What is the project's discounted payback?
WACC:
10.00%
Year
0
1
2
3
Cash flows
-$650
$500
$500
$500
a.
1.62 years
b.
1.58 years
c.
1.15 years
d.
1.47 years
e.
1.24 years
a.
2.15 years
2 full years gets us to $1000, which means we still owe $75. So the answer is 2 + 75/500, which is 2.15.
Taggart Inc. is considering a project that has the following cash flow data. What is the project's payback?
Year
0
1
2
3
Cash flows
-$1,075
$500
$500
$500
a.
2.15 years
b.
1.70 years
c.
2.11 years
d.
1.81 years
e.
2.45 years
b.
$33.11
Yonan Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the shorter payback, some value may be forgone. How much value will be lost in this instance? Note that under some conditions choosing projects on the basis of the shorter payback will not cause value to be lost.
WACC:
10.25%
0
1
2
3
4
CFS
-$950
$500
$800
$0
$0
CFL
-$2,100
$400
$800
$800
$1,000
a.
$39.40
b.
$33.11
c.
$41.39
d.
$28.47
e.
$37.74
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