Question Details

How much value will your firm sacrifice if it selects the project 


1.	Your company is choosing between the following non-repeatable, equally risky, mutually exclusive projects with the cash flows shown below. Your cost of capital is 10 percent.  How much value will your firm sacrifice if it selects the project with the higher IRR?

Project S:	  0         1         2         3
  |         |         |         |
-1,000     500       500       500

Project L:	  0         1         2         3         4         5
  |         |         |         |         |         |
-2,000   668.76    668.76    668.76    668.76    668.76

a.	$243.43
b.	$291.70  
c.	$332.50
d.	$481.15

2.    Assume a project has normal cash flows.  All else equal, which of the following statements is CORRECT?

a.	The project- IRR increases as the WACC declines.
b.	The project- NPV increases as the WACC declines.  
c.	The project- MIRR is unaffected by changes in the WACC.
d.	The project- regular payback increases as the WACC declines.


3.      Which of the following statements is CORRECT?

a.	One defect of the IRR method is that it does not take account of cash flows over a project- full life.
b.	One defect of the IRR method is that it does not take account of the time value of money.
c.	One defect of the IRR method is that it does consider the time value of money. 
d.	One defect of the IRR method is that it assumes that the cash flows to be received from a project can be reinvested at the IRR itself, and that assumption is often not valid.   



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