FIN 2010
Fin 350 Exam 2, Fall 2010 Name ___________________________
This has answers to the problems which I believe, but cannot guarantee, are correct.
1. Under certain conditions, a particular project may have more than one IRR. One condition under which this situation can occur is if, in addition to the initial investment at time = 0, a negative cash flow occurs at the end of the project's life.
a. True
b. False
2. The modified IRR (MIRR) method has wide appeal to professors, but most business executives prefer the NPV method to either the regular or modified IRR.
a. True
b. False
3. A firm should never undertake an investment if accepting the project would cause an increase in the firm's cost of capital.
a. True
b. False
4. A decrease in the firm's discount rate (r) will increase NPV, which could change the accept/reject decision for a potential project. However, such a change would have no impact on the project's IRR, hence on the accept/reject decision under the IRR method.
a. True
b. False
5. If the IRR of normal Project X is greater than the IRR of mutually exclusive Project Y (also normal), we can conclude that the firm will select X rather than Y if X has a NPV > 0.
a. True
b. False
6. Estimating project cash flows is considered the most difficult step in the capital budgeting process. Both the number of variables and the interdepartmental nature of the process contribute to the difficulty of estimating cash flows.
a. True
b. False
7. A project's market risk increases if the correlation of its cash flows with the economy decreases.
a. True
b. False
8. Risky projects can be evaluated by discounting expected cash flows using a risk-adjusted discount rate.
a. True
b. False
9. Opportunity costs include those cash inflows that could be generated from assets the firm already owns, if those assets are not used for the project being evaluated.
a. True
b. False
10. Suppose a firm is considering
This has answers to the problems which I believe, but cannot guarantee, are correct.
1. Under certain conditions, a particular project may have more than one IRR. One condition under which this situation can occur is if, in addition to the initial investment at time = 0, a negative cash flow occurs at the end of the project's life.
a. True
b. False
2. The modified IRR (MIRR) method has wide appeal to professors, but most business executives prefer the NPV method to either the regular or modified IRR.
a. True
b. False
3. A firm should never undertake an investment if accepting the project would cause an increase in the firm's cost of capital.
a. True
b. False
4. A decrease in the firm's discount rate (r) will increase NPV, which could change the accept/reject decision for a potential project. However, such a change would have no impact on the project's IRR, hence on the accept/reject decision under the IRR method.
a. True
b. False
5. If the IRR of normal Project X is greater than the IRR of mutually exclusive Project Y (also normal), we can conclude that the firm will select X rather than Y if X has a NPV > 0.
a. True
b. False
6. Estimating project cash flows is considered the most difficult step in the capital budgeting process. Both the number of variables and the interdepartmental nature of the process contribute to the difficulty of estimating cash flows.
a. True
b. False
7. A project's market risk increases if the correlation of its cash flows with the economy decreases.
a. True
b. False
8. Risky projects can be evaluated by discounting expected cash flows using a risk-adjusted discount rate.
a. True
b. False
9. Opportunity costs include those cash inflows that could be generated from assets the firm already owns, if those assets are not used for the project being evaluated.
a. True
b. False
10. Suppose a firm is considering