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AB1201-FINANCIAL MANAGEMENT 2019/2020 Semester 2 Main Content

Lecture 8 - The Basics of Capital Budgeting Review Test Submission: Lecture 8: Online Assignment

Review Test Submission: Lecture 8: Online Assignment

User CoB (NBS) LOOMBA RISHABH

Course AB1201-FINANCIAL MANAGEMENT 2019/2020 Semester 2 Main
Test Lecture 8: Online Assignment
Started 3/21/20 9:49 AM
Submitted 3/21/20 9:57 AM
Due Date 3/30/20 11:59 PM
Status Completed
Attempt Score 100 out of 100 points  
Time Elapsed 7 minutes
Instructions Answer the questions below to check your understanding of the concepts covered
in Lecture 8.

Results All Answers, Submitted Answers, Correct Answers, Feedback, Incorrectly Answered
Displayed Questions

Question 1 10 out of 10 points

Which of the following statements is CORRECT?

Assume that the project being considered has normal cash ows, with one out ow
followed by a series of in ows.

Selected E.
Answer: If a project’s NPV is less than zero, then its IRR must be less than the
WACC.

Answers: A.
The lower the WACC used to calculate it, the lower the calculated NPV will
be.

B.
The NPV of a relatively low-risk project should be found using a relatively
high WACC.

C.
If a project’s NPV is greater than zero, then its IRR must be less than zero.

D.
A project’s NPV is found by compounding the cash in ows at the IRR to
nd the terminal value (TV), then discounting the TV at the WACC.

E.
If a project’s NPV is less than zero, then its IRR must be less than the
WACC.
Question 2 10 out of 10 points

A rm should never accept a project if its acceptance would lead to an increase in the
rm's cost of capital (its WACC).

Selected Answer: False

Answers: True
False
Response The WACC should not be used for choosing a project. The rm should
Feedback: consider positive NPV project or the project that has its IRR > WACC.

Question 3 10 out of 10 points

Hindelang Inc. is considering a project that has the following cash ow and WACC data.
What is the project's MIRR?
Note that a project's projected MIRR can be less than the WACC (and even negative), in which case
it will be rejected.

WACC: 12.25%

Year 0 1 2 3 4
Cash Flow - $850 $300 $320 $340 $360

Selected Answer: C. 16.56%

Answers: A. 13.42%

B. 14.91%

C. 16.56%

D. 18.22%

E. 20.04%

Response WACC: 12.25%          

Feedback:
Year 0 1 2 3 4
 
Cash ows     -$850 $300 $320 $340 $360
Compounded values     $424.31   $403.20   $381.65   $360.00

TV = Sum of comp'ed in ows: $1,569.16

MIRR = 16.56% Found as discount rate that equates PV of TV to cost, discounted

back 4 years @ WACC

MIRR = 16.56% Alternative calculation, using Excel's MIRR function

Question 4 10 out of 10 points

A rm is considering Projects S and L, whose cash ows 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 rm on the best procedure.
If the wrong decision criterion is used, how much potential value would the rm lose?

WACC: 6.00%

Year 0 1 2 3 4
CFs - $1025 $380 $380 $380 $380
CFL - $2150 $765 $765 $765 $765

Selected Answer: C. $209.07

Answers: A. $188.68

B. $198.61

C. $209.07

D. $219.52

E. $230.49

Response WACC: 6.000%          

Feedback:
Year      0           1           2           3           4     
 
CFS -$1,025 $380 $380 $380 $380
CFL -$2,150 $765 $765 $765 $765

IRR, L        15.781%   
IRR, S   17.861%  
       
NPV, L    $500.81   
NPV, S    $291.74      $209.07
    $209.07   = Value lost if use the IRR criterion 

      S         L    
  291.7 500.8
0% 495.0 910.0
2% 421.9 762.9
4% 354.4 626.9
6% 291.7 500.8
8% 233.6 383.8
10% 179.5 274.9
12% 129.2 173.6
13.860% 85.4 85.4
14% 82.2 79.0
16% 38.3 -9.4
18% -2.8 -92.1
20% -41.3 -169.6
22% -77.4 -242.4
 24% -111.4 -310.7

Note that the WACC is constrained to be less than the crossover point, so
there is a con ict between NPV and IRR, hence following the IRR rule
results in a loss of value. In the next problem the constraint is relaxed.
Graphs such as this one could be created for the following problems, but
we do not show them.

Question 5 10 out of 10 points

Assume a project has normal cash ows.

All else equal, which of the following statements is CORRECT?

Selected B. A project’s NPV increases as the WACC declines.

Answer:

Answers: A. A project’s IRR increases as the WACC declines.

B. A project’s NPV increases as the WACC declines.

C.
A project’s discounted payback increases as the WACC declines.

D. A project’s regular payback increases as the WACC declines.

E. A project’s MIRR is una ected by changes in the WACC.

Question 6 10 out of 10 points

Suppose a rm relies exclusively on the payback method when making capital

budgeting decisions, and it sets a 4-year payback regardless of economic conditions.
Other things held constant, which of the following statements is most likely to be true?

Selected E.
Answer: If the 4-year payback results in accepting just the right set of projects
under average economic conditions, then this payback will result in too
few long-term projects when the economy is weak.

Answers: A.
It will accept too many short-term projects and reject too many long-term
projects (as judged by the NPV).

B.
It will accept too many long-term projects and reject too many short-term
projects (as judged by the NPV).

C.
The rm will accept too many projects in all economic states because a 4-
year payback is too low.

D.
The rm will accept too few projects in all economic states because a 4-
year payback is too high.

E.
 If the 4-year payback results in accepting just the right set of projects
under average economic conditions, then this payback will result in too
few long-term projects when the economy is weak.

Response Statement e is correct. In a weak economy, the interest rates and the
Feedback: WACC are likely to be low, and these conditions favor long-term projects.
But the constant 4-year payback would not recognize this situation.

Question 7 10 out of 10 points

Assuming that their NPVs based on the rm's cost of capital are equal, the NPV of a
project whose cash ows accrue relatively rapidly will be more sensitive to changes in
the discount rate than the NPV of a project whose cash ows come in later in its life.

Selected Answer: False

Answers: True
False

Question 8 10 out of 10 points

Which of the following statements is CORRECT?

Selected B.
Answer: Multiple IRRs can exist, but not multiple MIRRs. This is one reason some
people favor the MIRR over the regular IRR.

Answers: A.
The percentage di erence between the MIRR and the IRR is equal to the
project’s WACC.

B.
Multiple IRRs can exist, but not multiple MIRRs. This is one reason some
people favor the MIRR over the regular IRR.

C.
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.

D.
For mutually exclusive projects with normal cash ows, the NPV and MIRR
methods can never con ict, but their results could con ict with the
discounted payback and the regular IRR methods.

E.
If a rm 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.

Question 9 10 out of 10 points

Which of the following statements is CORRECT?

Assume that the project being considered has normal cash ows, with one out ow
followed by a series of in ows.
 Selected B.
Answer: If a project has normal cash ows and its IRR exceeds its WACC, then the
project’s NPV must be positive.

Answers: A.
If Project A has a higher IRR than Project B, then Project A must have the
lower NPV.

B.
If a project has normal cash ows and its IRR exceeds its WACC, then the
project’s NPV must be positive.

C.
The IRR calculation implicitly assumes that all cash ows are reinvested at
the WACC.

D.
If Project A has a higher IRR than Project B, then Project A must also have
a higher NPV.

E.
The IRR calculation implicitly assumes that cash ows are withdrawn from
the business rather than being reinvested in the business.

Question 10 10 out of 10 points

Hua Xing Inc is evaluating a potential project.

The project needs $400,000 up-front investment and would generate a constant cash
in ow, $X per year, for 8 years, with the rst cash in ow happening one year from
now.
Hua Xing Inc. currently has a weighted average cost of capital of 10% and it nds the
project gives a MIRR of 15%.
What is $X?

Selected Answer: C. $106,997

Answers: A. $74,978

B. $89,140

C. $106,997

D. $150,879

E. $229,358

Response Feedback:

Monday, March 23, 2020 1:23:20 AM SGT

← OK