115 Normal vs nonnormal cash flows Answer a EASY 33 Which of the following

115 normal vs nonnormal cash flows answer a easy 33

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(11.5) Normal vs. nonnormal cash flows Answer: a EASY 33 . Which of the following statements is CORRECT? a. Projects with “normal” cash flows can have only one real IRR. b. Projects with “normal” cash flows can have two or more real IRRs. c. Projects with “normal” cash flows must have two changes in the sign of the cash flows, e.g., from negative to positive to negative. If there are more sign changes, then the cash flow stream is “nonnormal.” d. The “multiple IRR problem” can arise if a project’s cash flows are “normal.” e. Projects with “nonnormal” cash flows are almost never encountered in the real world. Chapter 11: Capital Budgeting Conceptual Questions Page 101
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(11.8) Payback Answer: d EASY 34 . Which of the following statements is CORRECT? a. The regular payback method recognizes all cash flows over a project’s life. b. The discounted payback method recognizes all cash flows over a project’s life, and it also adjusts these cash flows to account for the time value of money. c. The regular payback method was, years ago, widely used, but virtually no companies even calculate the payback today. d. The regular payback is useful as an indicator of a project’s liquidity because it gives managers an idea of how long it will take to recover the funds invested in a project. e. The regular payback does not consider cash flows beyond the payback year, but the discounted payback overcomes this defect. (11.8) Payback Answer: b EASY 35 . 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 longer a project’s payback period, the more desirable the project is normally considered to be by this criterion. b. One drawback of the payback criterion for evaluating projects is that this method does not properly account for the time value of money. c. If a project’s payback is positive, then the project should be rejected because it must have a negative NPV. d. The regular payback ignores cash flows beyond the payback period, but the discounted payback method overcomes this problem. e. If a company uses the same payback requirement to evaluate all projects, say it requires a payback of 4 years or less, then the company will tend to reject projects with relatively short lives and accept long-lived projects, and this will cause its risk to increase over time. (11.8) Payback Answer: b EASY 36 . Which of the following statements is CORRECT? a. The shorter a project’s payback period, the less desirable the project is normally considered to be by this criterion. b. One drawback of the payback criterion for evaluating projects is that this method does not take account of cash flows beyond the payback period. c. If a project’s payback is positive, then the project should be accepted because it must have a positive NPV.
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