Question Details

Tuttle Enterprises is considering a project that has the following cash flow 



1.	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?
a.	It will accept too many short-term projects and reject too many long-term projects (as judged by the NPV).
b.	It will accept too many long-term projects and reject too many short-term projects (as judged by the NPV).
c.	The firm will accept too many projects in all economic states because a 4-year payback is too low.
d.	The firm will accept too few projects in all economic states because a 4-year payback is too high.
e.	If the 4-year payback results in accepting just the right set of projects under average economic conditions, then this payback will result in too few long-term projects when the economy is weak.


2.	Which of the following statements is CORRECT?
a.	If a project with normal cash flows has an IRR greater than the WACC, the project must also have a positive NPV.
b.	If Project A- IRR exceeds Project B-, then A must have the higher NPV.
c.	A project- MIRR can never exceed its IRR.
d.	If a project with normal cash flows has an IRR less than the WACC, the project must have a positive NPV.
e.	If the NPV is negative, the IRR must also be negative.

3.	Tuttle Enterprises is considering a project that has the following cash flow and WACC data.  What is the project's NPV?  Note that if a project's projected NPV is negative, it should be rejected.
WACC:  11.00%
Year		0	1	2	3	4	
Cash flows	-$1,000	$350	$350	$350	$350

a.	$77.49
b.	$81.56
c.	$85.86
d.	$90.15
e.	$94.66

4.	Warr Company is considering a project that has the following cash flow data.  What is the project's IRR?  Note that a project's projected IRR can be less than the WACC or negative, in both cases it will be rejected.
Year		0	1	2	3	4	
Cash flows	-$1,050	$400	$400	$400	$400
a.	14.05%
b.	15.61%
c.	17.34%
d.	19.27%
e.	21.20%





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