Solution Manual for Fundamentals of
Corporate Finance, 5th Edition Brand
New!!!
_____________________________________________________________________________________
Which of the following statements is/are INCORRECT?
a. Payback period considers the time value of money.
b. All else being equal, NPV decreases as the required rate of return increases.
c. All else being equal, IRR decreases as the required rate of return increases. (IRR does not utilize R in
calculation)
d. Both a and c are incorrect.
e. Both a and b are incorrect
Both A and C are incorrect
Which of the following statements is/are CORRECT?
a. Payback provides an indicator of a project's liquidity.
b. NPV and IRR always recommend the same project.
c. NPV profile illustrates the positive relationship between a project's NPV and its required rate of
return. (inverse relationship)
d. Positive IRR always leads to a positive NPV.
e. MIRR (Modified IRR) fails to account for cash flows after payback.
Payback provides an iindicator of a project's liquidity
Which of the following can be defined as a benefit-cost ratio?
Profitablity Index
Which of the following statements is/are INCORRECT?
a. With regards to NPV profile, both projects have the same NPV at the cross-over rate.
b. NPV profile can tell which project has a shorter payback period.
c. MIRR considers the time value of money.
d. Multiple IRRs can occur when the signs of cash flows change more than once.
e. NPV is positive when IRR is greater than the required rate of return.
NPV profile can tell which project has a shorter payback period
Which of the following statements is CORRECT?
a. Projects with "conventional" cash flows can have only one real IRR.
b. Projects with "conventional" cash flows can have two or more real IRRs.
,c. Projects with "conventional" cash flows must have two changes in the sign of the cash flows, e.g.,
from negative to positive to negative.
d. The "multiple IRR problem" can arise if a project's cash flows are "conventional."
e. Projects with "unconventional" cash flows are almost never encountered in the real world.
Projects with "conventional" cash flows can have only one real IRR
Which of the following statements is/are CORRECT? Assume that the project being considered has
normal cash flows, with one outflow followed by a series of inflows.
a. The longer a project's payback period, the more desirable the project is normally considered to be
by this criterion.
b. One drawback of the payback criterion for evaluating projects is that this method does not properly
account for the time value of money.
c. If a project's payback is positive, then it must have a positive NPV.
d. The regular payback ignores cash flows beyond the payback period.
e. Both b and d.
Both B and D
Which of the following statements is CORRECT?
a. The NPV method assumes that cash flows will be reinvested at the required return, while the IRR
method assumes reinvestment at the IRR.
b. The NPV method assumes that cash flows will be reinvested at the risk-free rate, while the IRR
method assumes reinvestment at the IRR.
c. The NPV method assumes that cash flows will be reinvested at the required return, while the IRR
method assumes reinvestment at the risk-free rate.
d. The NPV method does not consider all relevant cash flows, particularly cash flows beyond the
payback period.
e. The IRR method does not consider all relevant cash flows, particularly cash flows beyond the
payback period.
The NPV method assumes that cash flows will be reinvested at the required return, while the
IRR method assumes reinvestment at the IRR
Which of the following statements is/are CORRECT?
a. If a project with normal cash flows has an IRR greater than the required rate of return, the project
must have a positive NPV.
b. If Project A's IRR exceeds Project B's, then A must have the higher NPV. (depending on I; see graph
below)
c. If a project with conventional cash flows has an IRR less than the required rate of return, the project
must have a positive NPV.
d. If the NPV is negative, the IRR must also be negative. (IRR < I, NPV is negative, so IRR does not have
to be negative value; also refer to #2 and #3 in this exercise)
e. Both a and d.
, If a project with normal cash flows has an IRR greater than the required rate of return, the
project must have a positive NPV.
Andrea is analyzing a proposed project to determine how changes in the variable costs per unit would
affect the project's net present value. What type of analysis is Andrea conducting?
Sensitivity analysis
Which of the following should a company consider when it is estimating the cash flows for use in
analyzing a proposed project?
The new project is expected to reduce sales of the company's existing products by 5%.
Which of the following statements is CORRECT?
a. A sunk cost is any cost that must be expended in order to complete a project and bring it into
operation.
b. A sunk cost is any cost that was expended in the past but can be recovered if the firm decides not to
go forward with the project.
c. A sunk cost is a cost that was incurred and expensed in the past and cannot be recovered if the firm
decides not to go forward with the project.
d. Sunk costs were formerly hard to deal with, but once the NPV method came into wide use, it
became possible to simply include sunk costs in the cash flows and then calculate the PV.
e. A good example of a sunk cost is a situation where a retailer opens a new store, and that leads to a
decline in sales of some of the firm's existing stores.
A sunk cost is a cost that was incurred and expensed in the past and cannot be recovered if the
firm decides not to go forward with the project.
A company is considering a new project. The CFO plans to calculate the project's NPV by first
estimating the relevant cash flows for each year of the project's life (the initial investment cost, the
annual operating cash flows, and the terminal cash flow), then discounting those cash flows at the
company's WACC. Which of the following factors should the CFO INCLUDE IN THE CASH FLOWS when
estimating the relevant cash flows?
The investment in working capital required to operate the project, even if that investment will
be recovered at the end of the project's life.
Which of the following statements is CORRECT?
a. An externality is a situation where a project would have an adverse effect on some other part of the
firm's overall operations. If the project would have a favorable effect on other operations, then this is
not an externality.
b. An example of an externality is a situation where a bank opens a new office, and that new office
causes deposits of the bank's other offices to decline.
c. The NPV method automatically deals correctly with externalities, even if the externalities are not
specifically identified, but the IRR method does not. This is another reason to favor the NPV.
d. Both the NPV and IRR methods deal correctly with externalities, even if the externalities are not
Corporate Finance, 5th Edition Brand
New!!!
_____________________________________________________________________________________
Which of the following statements is/are INCORRECT?
a. Payback period considers the time value of money.
b. All else being equal, NPV decreases as the required rate of return increases.
c. All else being equal, IRR decreases as the required rate of return increases. (IRR does not utilize R in
calculation)
d. Both a and c are incorrect.
e. Both a and b are incorrect
Both A and C are incorrect
Which of the following statements is/are CORRECT?
a. Payback provides an indicator of a project's liquidity.
b. NPV and IRR always recommend the same project.
c. NPV profile illustrates the positive relationship between a project's NPV and its required rate of
return. (inverse relationship)
d. Positive IRR always leads to a positive NPV.
e. MIRR (Modified IRR) fails to account for cash flows after payback.
Payback provides an iindicator of a project's liquidity
Which of the following can be defined as a benefit-cost ratio?
Profitablity Index
Which of the following statements is/are INCORRECT?
a. With regards to NPV profile, both projects have the same NPV at the cross-over rate.
b. NPV profile can tell which project has a shorter payback period.
c. MIRR considers the time value of money.
d. Multiple IRRs can occur when the signs of cash flows change more than once.
e. NPV is positive when IRR is greater than the required rate of return.
NPV profile can tell which project has a shorter payback period
Which of the following statements is CORRECT?
a. Projects with "conventional" cash flows can have only one real IRR.
b. Projects with "conventional" cash flows can have two or more real IRRs.
,c. Projects with "conventional" cash flows must have two changes in the sign of the cash flows, e.g.,
from negative to positive to negative.
d. The "multiple IRR problem" can arise if a project's cash flows are "conventional."
e. Projects with "unconventional" cash flows are almost never encountered in the real world.
Projects with "conventional" cash flows can have only one real IRR
Which of the following statements is/are CORRECT? Assume that the project being considered has
normal cash flows, with one outflow followed by a series of inflows.
a. The longer a project's payback period, the more desirable the project is normally considered to be
by this criterion.
b. One drawback of the payback criterion for evaluating projects is that this method does not properly
account for the time value of money.
c. If a project's payback is positive, then it must have a positive NPV.
d. The regular payback ignores cash flows beyond the payback period.
e. Both b and d.
Both B and D
Which of the following statements is CORRECT?
a. The NPV method assumes that cash flows will be reinvested at the required return, while the IRR
method assumes reinvestment at the IRR.
b. The NPV method assumes that cash flows will be reinvested at the risk-free rate, while the IRR
method assumes reinvestment at the IRR.
c. The NPV method assumes that cash flows will be reinvested at the required return, while the IRR
method assumes reinvestment at the risk-free rate.
d. The NPV method does not consider all relevant cash flows, particularly cash flows beyond the
payback period.
e. The IRR method does not consider all relevant cash flows, particularly cash flows beyond the
payback period.
The NPV method assumes that cash flows will be reinvested at the required return, while the
IRR method assumes reinvestment at the IRR
Which of the following statements is/are CORRECT?
a. If a project with normal cash flows has an IRR greater than the required rate of return, the project
must have a positive NPV.
b. If Project A's IRR exceeds Project B's, then A must have the higher NPV. (depending on I; see graph
below)
c. If a project with conventional cash flows has an IRR less than the required rate of return, the project
must have a positive NPV.
d. If the NPV is negative, the IRR must also be negative. (IRR < I, NPV is negative, so IRR does not have
to be negative value; also refer to #2 and #3 in this exercise)
e. Both a and d.
, If a project with normal cash flows has an IRR greater than the required rate of return, the
project must have a positive NPV.
Andrea is analyzing a proposed project to determine how changes in the variable costs per unit would
affect the project's net present value. What type of analysis is Andrea conducting?
Sensitivity analysis
Which of the following should a company consider when it is estimating the cash flows for use in
analyzing a proposed project?
The new project is expected to reduce sales of the company's existing products by 5%.
Which of the following statements is CORRECT?
a. A sunk cost is any cost that must be expended in order to complete a project and bring it into
operation.
b. A sunk cost is any cost that was expended in the past but can be recovered if the firm decides not to
go forward with the project.
c. A sunk cost is a cost that was incurred and expensed in the past and cannot be recovered if the firm
decides not to go forward with the project.
d. Sunk costs were formerly hard to deal with, but once the NPV method came into wide use, it
became possible to simply include sunk costs in the cash flows and then calculate the PV.
e. A good example of a sunk cost is a situation where a retailer opens a new store, and that leads to a
decline in sales of some of the firm's existing stores.
A sunk cost is a cost that was incurred and expensed in the past and cannot be recovered if the
firm decides not to go forward with the project.
A company is considering a new project. The CFO plans to calculate the project's NPV by first
estimating the relevant cash flows for each year of the project's life (the initial investment cost, the
annual operating cash flows, and the terminal cash flow), then discounting those cash flows at the
company's WACC. Which of the following factors should the CFO INCLUDE IN THE CASH FLOWS when
estimating the relevant cash flows?
The investment in working capital required to operate the project, even if that investment will
be recovered at the end of the project's life.
Which of the following statements is CORRECT?
a. An externality is a situation where a project would have an adverse effect on some other part of the
firm's overall operations. If the project would have a favorable effect on other operations, then this is
not an externality.
b. An example of an externality is a situation where a bank opens a new office, and that new office
causes deposits of the bank's other offices to decline.
c. The NPV method automatically deals correctly with externalities, even if the externalities are not
specifically identified, but the IRR method does not. This is another reason to favor the NPV.
d. Both the NPV and IRR methods deal correctly with externalities, even if the externalities are not
