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Choosing the correct options

1. Which of the following statements is CORRECT?
a. The NPV profile graph for a normal project will generally have a positive (upward) slope as the life of the project increases.
b. An NPV profile graph is designed to give decision makers an idea about how a project's risk varies with its life.
c. An NPV profile graph is designed to give decision makers an idea about how a project's contribution to the firm's value varies with the cost of capital.
d. We cannot draw a project's NPV profile unless we know the appropriate WACC for use in evaluating the project's NPV.
e. An NPV profile graph shows how a project's payback varies as the cost of capital changes.

2. 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.
a. The higher the WACC used to calculate the NPV, the lower the calculated NPV will be.
b. If a project's NPV is greater than zero, then its IRR must be less than the WACC.
c. If a project's NPV is greater than zero, then its IRR must be less than zero.
d. The NPVs of relatively risky projects should be found using relatively low WACCs.
e. A project's NPV is generally found by compounding the cash inflows at the WACC to find the terminal value (TV), then discounting the TV at the IRR to find its PV.

3. 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.
a. If Project A has a higher IRR than Project B, then Project A must also have a higher NPV.
b. The IRR calculation implicitly assumes that all cash flows are reinvested at the WACC.
c. The IRR calculation implicitly assumes that cash flows are withdrawn from the business rather than being reinvested in the business.
d. If a project has normal cash flows and its IRR exceeds its WACC, then the project's NPV must be positive.
e. If Project A has a higher IRR than Project B, then Project A must have the lower NPV.

4. Which of the following statements is CORRECT?
a. If two projects are mutually exclusive, then they are likely to have multiple IRRs.
b. If a project is independent, then it cannot have multiple IRRs.
c. Multiple IRRs can occur only if the signs of the cash flows change more than once.
d. If a project has two IRRs, then the smaller one is the one that is most relevant, and it should be accepted and relied upon.
e. For a project to have more than one IRR, then both IRRs must be greater than the WACC.

5. Which of the following statements is CORRECT?
a. The NPV method assumes that cash flows will be reinvested at the risk-free rate, while the IRR method assumes reinvestment at the IRR.
b. The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the risk-free rate.
c. The NPV method does not consider all relevant cash flows, particularly cash flows beyond the payback period.
d. The IRR method does not consider all relevant cash flows, particularly cash flows beyond the payback period.
e. The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinv.

Solution Preview

1. Which of the following statements is CORRECT?
c. An NPV profile graph is designed to give decision makers an idea about how a project's contribution to the firm's value varies with the cost of capital.

2. Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one ...

Solution Summary

Solutions select the correct options among the given statements.

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