Strayer FIN534 Week 6 Homework Assignment Chapter 10

FIN 534 Week 6 Homework
Assignment Chapter 10
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assumes that cash flows are withdrawn from the business rather than being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
reinvestment at the IRR.