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GMT 611 Chapter 10 Assignment
tiple Choice
tify the choice that best completes the statement or answers the question.
_
1.
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.
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.
b.
The higher the WACC used to calculate the NPV, the lower the calculated NPV will be.
c.
If a project's NPV is greater than zero, then its IRR must be less than the WACC.
d.
If a project's NPV is greater than zero, then its IRR must be less than zero.
e.
The NPVs of relatively risky projects should be found using relatively low WACCs.
_
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.
If Project A has a higher IRR than Project B, then Project A must have the lower NPV.
b.
If Project A has a higher IRR than Project B, then Project A must also have a higher NPV.
c.
The IRR calculation implicitly assumes that all cash flows are reinvested at the WACC.
d.
The IRR calculation implicitly assumes that cash flows are withdrawn from the business rather than
being reinvested in the business.
e.
If a project has normal cash flows and its IRR exceeds its WACC, then the project's NPV must be
positive.
_
3.
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 to $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?
a.
Project S.
b.
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