University of Illinois, Urbana Champaign - FIN 221 Chapter 11 Preflight 1)Projects A and B are mutually exclusive

University of Illinois, Urbana Champaign - FIN 221

Chapter 11 Preflight

1)Projects A and B are mutually exclusive. Project A has a NPV of -$10,000 and Project B has a NPV of -$15,000. Which project(s) should be accepted?

a.         Project A

b.         Project B

c.         Both projects A and B

d.         Neither project should be accepted

2. When should a normal project be accepted according to internal rate of return (IRR)?

a.         IRR < WACC

b.         Only if IRR = WACC

 c. IRR > WACC

d. None of the above.

3. What is the crossover rate?

a.         The rate where two normal projects have the same net present value.

b.         A project's expected return.

c.         A project's required return.

d.         The difference between two normal project's internal rates of return.

4. What is given by the point where a normal project's net present value profile crosses the x- axis?

a.         The crossover rate.

b.         MIRR

c. IRR

d. None of the above.

5. The MIRR is the compound annual interest rate that equates      with     for a project?

a.         The present value of the future cash flows at the IRR; the cost.

b.         The future value of the cash inflows at the WACC; the present value of the outflows at the WACC

c.         The present value of the cash inflows at the WACC; the present value of the outflows at the WACC

d.         None of the above.

6. What does the discounted payback period ignore?

a.         The time value of money

b. Cash flows beyond the payback period

 c. The cost of the project.

d. Both a and b.

7.         Projects A and B are mutually exclusive. Project A has a NPV of -$10,000 and Project B has a NPV of -$15,000. Which project(s) should be accepted?

a.         Project A

b.         Project B

c.         Both projects A and B

d.         Neither project should be accepted

8.         Which of the following is true for a normal project whose IRR is greater than its WACC (cost of capital)?

a.         The project's NPV < 0.

b.         The project's NPV = 0.

 c. The project's NPV > 0.

d. The project has multiple IRRs

9.         When does a ranking conflict exist between NPV and IRR for two normal projects?

a.         When the WACC equals the crossover rate.

b.         When the WACC is less than the crossover rate.

c.         When the WACC is greater than the crossover rate.

d.         A ranking conflict cannot exist between NPV and IRR for two normal projects.

10.       Projects C and D are normal and mutually exclusive with the same WACC. Project C has a NPV of $10,000 and an IRR of 21%. Project D has a NPV of $12,000 and an IRR of 19%.

Which project(s) should be selected?

a.         Project C

b. Project D

c. Both projects C and D

d. Neither project should be selected.

11.       When should a normal project be accepted according to the modified internal rate of return (MIRR)?

a.         MIRR < WACC

b.         Only if MIRR = WACC

c. MIRR > WACC

d. MIRR > IRR.

12.       When should a project be accepted according to net present value (NPV)?

a.         NPV > 0

b.         NPV < 0

c.         Only if the NPV = 0

d.         None of the above

13.       What does the payback period ignore?

a.         The time value of money

b.         Cash flows beyond the payback period

c.         The cost of the project.

   d. Both a and b.