FIN 701 Exam 5 Questions with
Complete Solutions
What are the NPV and IRR for the following project? WACC = 10%
Year. Cash flow from project
0 -$1,200
1 $700
2 $700
3 $600 - Answer-NPV = 465.66
IRR = 31.56
Simms Corp. is considering a project that has the following cash flow data. What is the
project's IRR? Should the project be accepted or rejected on the IRR?
Year: 0, 1, 2, 3
CF: -$1,200, $600, $400, $550 - Answer-IRR = 14.27
Accept the project since IRR > WACC [14.27 > 12]
Tag Inc. is considering a project that has the following cash flow data. What is the
projects payback?
Year: 0, 1, 2, 3
CF: -$1,100, $500, $500, $300 - Answer-2.33 years
Fer Designs is considering a project that has the following cash flow and WACC data.
What is the project's discounted payback? The WACC is 9%.
Year: 0, 1, 2, 3
CF: -$1,000, $400, $100, $800 - Answer-2.89 years
A project's NPV increases as the WACC declines.
T/F - Answer-True
Using the following data:
WACC = 11%
Project A's NPV = -$5,000 Project A's IRR = 10%
Project B's NPV = $12,000 Project B's IRR = 13%
Assuming the two projects are independent, what projects should be accepted? -
Answer-For NPV, reject A and accept B
For IRR, reject A and accept B
Using the following data:
WACC = 9%
Project A's NPV = $5,000 Project A's IRR = 10%
, Project B's NPV = $10,000 Project B's IRR = 13%
Assuming the two projects are independent, what projects should be accepted? -
Answer-Accept both projects for both NPV and IRR
Using the following data:
WACC = 11%
Project A's NPV = $5,000 Project A's IRR = 10%
Project B's NPV = $12,000 Project B's IRR = 13%
Assuming the two projects are mutually exclusive, what projects should be accepted? -
Answer-For NPV, reject project A and accept project B
For IRR, reject project A and accept project B
Using the following data:
WACC = 9%
Project A's NPV = $5,000 Project A's IRR = 10%
Project B's NPV = $10,000 Project B's IRR = 13%
Assuming the two projects are mutually exclusive, what projects should be accepted? -
Answer-For NPV, reject project A and accept project B
For IRR, reject project A and accept project B
The iRR is the discount rate that equates NPV with zero.
T/F - Answer-TRUE
The IRR method is generally preferred over the NPV method.
T/F - Answer-FALSE
One disadvantage of the payback method for evaluating potential investment is that it
considers time value of money.
T/F - Answer-FALSE
Because "present value" refers to the value of cash flows that occur at different points in
time, a series of present values of cash flows should not be summed to determine the
value of a capital budgeting project.
T/F - Answer-FALSE
A basic rule in capital budgeting is that if a project's NPV exceeds its IRR, then the
project should be accepted.
T/F - Answer-FALSE
Conflicts between two mutually exclusive projects occasionally occur, where the NPV
method ranks one project higher but the IRR method puts the other one first. In theory,
such conflicts should be resolved in favor of the project with the higher NPV.
T/F - Answer-TRUE
The internal rate of return is that discount rate that equates the present value of the
cash outflows (or costs) with the present value of the cash inflows.
