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Question;19.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?;20.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 as;decreased, and their cash flows will not be affected by the change in economic;conditions. Under these conditions, which of the following statement is;CORRECT?;21.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?;22.Projects A and B have identical expected lives and;identical initial cash outflows (costs). However, most of one project?s cash;flows come in the early years, while most of the other project?s cash flows;occur in the later years. The two NPV profiles are given below: Which of the;following statements is CORRECT?23.Projects S and L both have an initial cost;of $10,000, followed by a series of positive cash inflows. Project S?s;undiscounted net cash flows total $20,000, while L?s total undiscounted flows;are $30,000. At a WACC of 10%, the two projects have identical NPVs. Which;project?s NPV is more sensitive to changes in the WACC?;24.Projects C and D are mutually exclusive and have normal;cash flows. Project C has a higher NPV if the WACC is less than 12%, whereas;Project D has a higher NPV if the WACC exceeds 12%. Which of the following;statements is CORRECT?32.Projects S and L are equally risky, mutually exclusive;and have normal cash flows. Project S has an IRR of 15%, while Project L?s IRR;is 12%. The two projects have the same NPV when the WACC is 7%. Which of the;following statements is CORRECT?33.Westchester Corp. is considering two equally risky;mutually exclusive projects, both of which have normal cash flows. Project A;has an IRR of 11%, while Project B's IRR is 14%. When the WACC is 8%, the;projects have the same NPV. Given this information, which of the following;statements is CORRECT?34.You are considering two mutually exclusive, equally;risky, projects. Both have IRRs that exceed the WACC. Which of the following;statements is CORRECT? Assume that the projects have normal cash flows, with;one outflow followed by a series of inflows.35.Project X?s IRR is 19% and Project Y?s IRR is 17%. The;projects have the same risk and the same lives, and each has constant cash;flows during each year of their lives. If the WACC is 10%, Project Y has a;higher NPV than X. Given this information, which of the following statements is;CORRECT?36.You are on the staff of Camden Inc. The CFO believes;project acceptance should be based on the NPV, but Steve Camden, the president;insists that no project should be accepted unless its IRR exceeds the project?s;risk-adjusted WACC. Now you must makearecommendation on a project that has a cost of $15,000 and;two cash flows: $110,000 at the end of Year 1 and -$100,000 at the end of Year;2. The president and the CFO both agree that the appropriate WACC for this;project is 10%. At 10%, the NPV is $2,355.37, but you find two IRRs, one at;6.33% and one at 527%, and a MIRR of 11.32%. Which of the following statements;best describes your optimal recommendation, i.e., the analysis and;recommendation that is best for the company and least likely to get you in;trouble with either the CFO or the president?37.Which of the following statements is CORRECT? Assume that;the project being considered has normal cash flows, with one cash outflow at t;= 0 followed by a series of positive cash flows.38.Projects S and L both have normal cash flows, and the;projects have the same risk, hence both are evaluated with the same WACC, 10%.;However, S has a higher IRR than L. Which of the following statements is;CORRECT?39.Which of the following statements is CORRECT? Assume that;all projects being considered have normal cash flows and are equally risky.40.A company is choosing between two projects. The larger;project has an initial cost of $100,000, annual cash flows of $30,000 for 5;years, and an IRR of 15.24%. The smaller project has an initial cost of;$50,000, annual cash flows of $16,000 for 5 years, and an IRR of 16.63%. The;projects are equally risky. Which of the following statements is CORRECT?41.McCall Manufacturing has a WACC of 10%. The firm is;considering two normal, equally risky, mutually exclusive, but not repeatable;projects. The two projects have the same investment costs, but Project A has an;IRR of 15%, while Project B has an IRR of 20%. Assuming the projects' NPV;profiles cross in the upper right quadrant, which of the following statements;is CORRECT?;42.Projects A and B are mutually exclusive and have normal;cash flows. Project A has an IRR of 15% and B's IRR is 20%. The company?s WACC;is 12%, and at that rate Project A has the higher NPV. Which of the following;statements is CORRECT?;="msonormal">

 

Paper#50961 | Written in 18-Jul-2015

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