c.
Must exceed the cost of capital in order for the firm to accept the
investment.
d.
Is similar to the yield to maturity on a bond.
e.
Statements c and d are correct.
Chapter 10 - Page 10

MIRR
Answer: e
Diff: M
32
.
Which of the following statements is most correct?
The modified IRR
(MIRR) method:
a. Always leads to the same ranking decision as NPV for independent
projects.
b.
Overcomes the problem of multiple internal rates of return.
c.
Compounds cash flows at the cost of capital.
d.
Overcomes the problems of cash flow timing and project size that lead
to criticism of the regular IRR method.
e.
Statements b and c are correct.
Ranking methods
Answer: b
Diff: M
33
.
Which of the following statements is correct?
a.
Because discounted payback takes account of the cost of capital, a
project’s discounted payback is normally shorter than its regular
payback.
b.
The NPV and IRR methods use the same basic equation, but in the NPV
method the discount rate is specified and the equation is solved for
NPV, while in the IRR method the NPV is set equal to zero and the
discount rate is found.
c.
If the cost of capital is less than the crossover rate for two mutually
exclusive projects’ NPV profiles, a NPV/IRR conflict will not occur.
d.
If you are choosing between two projects that have the same life, and
if their NPV profiles cross, then the smaller project will probably be
the one with the steeper NPV profile.
e.
If the cost of capital is relatively high, this will favor larger,
longer-term projects over smaller, shorter-term alternatives because it
is good to earn high rates on larger amounts over longer periods.
Ranking methods
Answer: d
Diff: M
34
.
When comparing two mutually exclusive projects of equal size and equal
life, which of the following statements is most correct?
a.
The project with the higher NPV may not always be the project with the
higher IRR.
b.
The project with the higher NPV may not always be the project with the
higher MIRR.
c.
The project with the higher IRR may not always be the project with the
higher MIRR.
d.
Statements a and c are correct.
e.
All of the statements above are correct.
Chapter 10 - Page 11

Project selection
Answer: a
Diff: M
35
.
A company estimates that its weighted average cost of capital (WACC) is 10
percent.
Which of the following independent projects should the company
accept?
a.
Project A requires an up-front expenditure of $1,000,000 and generates
a net present value of $3,200.
b.
Project B has a modified internal rate of return of 9.5 percent.
c.
Project C requires an up-front expenditure of $1,000,000 and generates
a positive internal rate of return of 9.7 percent.
d.
Project D has an internal rate of return of 9.5 percent.
e.
None of the projects above should be accepted.
Miscellaneous concepts
Answer: e
Diff: M
36
.
Which of the following is most correct?

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