Net Present Value and Correct Answer

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Question 1
2 out of 2 points
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| Assume that the economy is in a mild recession, and as a result interest rates and money costs generally are relatively low. The WACC for two mutually exclusive projects that are being considered is 8%. Project S has an IRR of 20% while Project L's IRR is 15%. The projects have the same NPV at the 8% current WACC. However, you believe that the economy is about to recover, and money costs and thus your WACC will also increase. You also think that the projects will not be funded until the WACC has increased, and their cash flows will not be affected by the change in economic conditions. Under these conditions, which of the following statements is CORRECT?Answer | | | | | Selected Answer:| You should recommend Project S, because at the new WACC it will have the higher NPV.| Correct Answer:| You should recommend Project S, because at the new WACC it will have the higher NPV.|

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Question 2
2 out of 2 points
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| Which of the following statements is CORRECT?Answer | | | | | Selected Answer:| Multiple IRRs can occur only if the signs of the cash flows change more than once.| Correct Answer:| Multiple IRRs can occur only if the signs of the cash flows change more than once.|

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Question 3
2 out of 2 points
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| Which of the following statements is CORRECT?Answer | | | | | Selected Answer:| One advantage of the NPV over the IRR is that NPV assumes that cash flows will be reinvested at the WACC, whereas IRR assumes that cash flows are reinvested at the IRR. The NPV assumption is generally more appropriate.| Correct Answer:| One advantage of the NPV over the IRR is that NPV assumes that cash flows will be reinvested at the WACC, whereas IRR assumes that cash flows are reinvested at the IRR. The NPV assumption is generally more appropriate.|

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Question 4
2 out of 2 points
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| Which of the following statements is CORRECT?Answer | | | | | Selected Answer:| 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.| Correct Answer:| 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.|

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Question 5
2 out of 2 points
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| Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.Answer | | | | | Selected Answer:| If a project has normal cash flows and its IRR exceeds its WACC, then the project’s NPV must be positive.| Correct Answer:| If a project has normal cash flows and its IRR exceeds its WACC, then the project’s NPV must be positive.|

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Question 6
2 out of 2 points
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| Assume that the economy is enjoying a strong boom, and as a result interest rates and money costs generally are relatively high. The WACC for two mutually exclusive projects that are being considered is 12%. Project S has an IRR of 20% while Project L's IRR is 15%. The projects have the same NPV at the 12% current WACC. However, you believe that the economy will soon fall into a mild recession, and money costs and thus your WACC will soon decline. You also think that the projects will not be funded until the WACC has decreased, and their cash flows will not be affected by the change in economic conditions. Under these conditions, which of the following statements is CORRECT?Answer | | | | | Selected Answer:| You should recommend Project L, because at the new WACC it will have the higher NPV.| Correct Answer:| You should recommend Project L, because at the new WACC it will have the higher NPV.|

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Question 7
2 out of 2 points
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| Which of the following statements is CORRECT? Assume that the...
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