Question

1. Multiple internal rates or return occur when:

Select one:

A. The project’s cash flows are larger earlier in the life of the project.

B. The project’s cash flows are larger later in the life of the project.

C. When the project’s cash flows experience normal cash flow streams (i.e. one sign change).

D. When the project’s cash flows experience non-normal cash flow streams (i.e. two or more sign changes).

E. When the IRR is equal to the WACC.

2. Which of the following is considered the
**best** method for financial managers when deciding
project approval/rejection?

Select one:

A. Payback method

B. Discounted payback

C. NPV

D. IRR

E. MIRR

3. Four of the following statements are truly disadvantages of the regular payback method, but one is not a disadvantage of this method. Which one is NOT a disadvantage of the payback method?

Select one:

A. Lacks an objective, market-determined benchmark for making decisions.

B. Ignores cash flows beyond the payback period.

C. Does not directly account for the time value of money.

D. Does not provide any indication regarding a project’s liquidity or risk.

E. Does not take account of differences in size among projects.

Answer #1

Solution 1.

**The correct answer is (D).**

Multiple internal rates of return occur when the project’s cash flows experience non-normal cash flow streams (i.e. two or more sign changes).

Solution 2.

**The correct answer is (C).**

NPV is considered as the best method as it gives us the present worth of the project as if its positive it is accepted and if it is negative it is rejected.

Solution 3.

**The correct answer is (D).**

Does not provide any indication regarding a project’s liquidity or risk.

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Four of the following statements are truly disadvantages of the
regular payback method, but one is not a disadvantage of this
method. Which one is NOT a disadvantage of the payback method? a.
Ignores cash flows beyond the payback period. b. Does not directly
account for the time value of money. c. Does not provide any
indication regarding a project’s liquidity or risk. d. Lacks an
objective, market-determined benchmark for making decisions. e.
Does not take account of differences in...

1. Which of the following statements is CORRECT?
A. One problem of the IRR method is that it does not consider
all cash flows of a project.
B. One problem of the IRR method is that it does not take into
account the time value of money.
C. One problem of the IRR method is that it does not consider
the reinvestment of cash inflows.
D. One problem of the IRR method is that a dollar received today
is valued...

Modified internal rate of return (MIRR)
The IRR evaluation method assumes that cash flows from the
project are reinvested at the same rate equal to the IRR. However,
in reality the reinvested cash flows may not necessarily generate a
return equal to the IRR. Thus, the modified IRR approach makes a
more reasonable assumption other than the project’s IRR.
Consider the following situation:
Fuzzy Button Clothing Company is analyzing a project that
requires an initial investment of $500,000. The project’s...

4. Modified internal rate of return (MIRR)
The IRR evaluation method assumes that cash flows from the
project are reinvested at the same rate equal to the IRR. However,
in reality the reinvested cash flows may not necessarily generate a
return equal to the IRR. Thus, the modified IRR approach makes a
more reasonable assumption other than the project’s IRR.
Consider the following situation:
Cold Goose Metal Works Inc. is analyzing a project that requires
an initial investment of $500,000....

Which of the following statement is incorrect? Select one:
a. When the internal rate of return is less than this required
rate of return, the project is rejected.
b. When NPV equals zero, the required rate of return, or
discount rate used in the NPV calculation, is greater than the
projected rate of return, IRR.
c. Most of the answers are correct.
d. The number of time periods it takes to cover the initial
investment is called the payback period....

Which of the following occurs when a new project increases the
sales and therefore the cash flows of an existing product?
Erosion
Sunk Costs
Opportunity Costs
Synergy
Which of the following method must be preferred if the number
changes in the signs of future cash flows within the project’s
economic life is more than one?
IRR
Payback Period
Discounted Payback Period
NPV
Which of the following does the estimation of the cash flows of
a project depend on?
Revenues
Variable...

Which of the following statements is CORRECT?
A) One defect of the IRR method is that it does not take account of
cash flows over a project’s full life.
B) One defect of the IRR method is that it does not take account of
the time value of money.
C) One defect of the IRR method is that it does not take account of
the cost of capital.
D) One defect of the IRR method is that it values a...

4. Modified internal rate of return (MIRR)
The IRR evaluation method assumes that cash flows from the
project are reinvested at the same rate equal to the IRR. However,
in reality the reinvested cash flows may not necessarily generate a
return equal to the IRR. Thus, the modified IRR approach makes a
more reasonable assumption other than the project’s IRR.
Consider the following situation:
Green Caterpillar Garden Supplies Inc. is analyzing a project
that requires an initial investment of $2,500,000....

4. Modified internal rate of return (MIRR)
The IRR evaluation method assumes that cash flows from the
project are reinvested at the same rate equal to the IRR. However,
in reality the reinvested cash flows may not necessarily generate a
return equal to the IRR. Thus, the modified IRR approach makes a
more reasonable assumption other than the project’s IRR.
Consider the following situation:
Green Caterpillar Garden Supplies Inc. is analyzing a project
that requires an initial investment of $3,225,000....

11. The NPV and payback period
What information does the payback period provide?
A project’s payback period (PB) indicates the number of years
required for a project to recover its initial investment using its
operating cash flows. As the theoretical soundness of the
conventional (undiscounted) PB technique was criticized, the model
was modified to incorporate the time value of money-adjusted
operating cash flows to create the discounted payback method. While
both payback models continue to reflect faulty ranking criteria,
they...

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