Question
QUESTION 6 Thorley Inc. is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's projected
QUESTION 6
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Thorley 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 or negative, in both cases it will be rejected.
Year
0
1
2
3
4
5
Cash flows
-$1,225
$325
$325
$325
$325
$325
a. 10.43%
b. 8.79%
c. 7.77%
d. 10.22%
e. 11.65%
0.5 points
QUESTION 7
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Suppose a firm 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?
a. It will accept too many long-term projects and reject too many short-term projects (as judged by the NPV).
b. It will accept too many short-term projects and reject too many long-term projects (as judged by the NPV).
c. 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.
d. The firm will accept too many projects in all economic states because a 4-year payback is too low.
e. The firm will accept too few projects in all economic states because a 4-year payback is too high.
0.5 points
QUESTION 8
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Resnick 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
-$300
$200
$200
$200
a. 1.16 years
b. 1.14 years
c. 1.50 years
d. 1.52 years
e. 1.29 years
0.5 points
QUESTION 9
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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 projects full life.
b. One defect of the IRR method is that it assumes that the cash flows to be received from a project can be reinvested at the IRR itself, and that assumption is often not valid.
c. One defect of the IRR method is that it values a dollar received today the same as a dollar that will not be received until sometime in the future.
d. One defect of the IRR method is that it does not take account of the cost of capital.
e. One defect of the IRR method is that it does not take account of the time value of money.
0.5 points
QUESTION 10
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Masulis Inc. 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
4
Cash flows
-$825
$525
$485
$445
$405
a. 1.76 years
b. 1.87 years
c. 2.32 years
d. 1.46 years
e. 1.42 years
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