5. A capital budgeting project has a positive net present value. The internal rate of return of the project MUST A. be less than the cost of capital. B. be greater than the cost of capital. C. be equal to the cost of capital. D. be less than the payback period. 6. When the financial manger is faced with making a mutually exclusive capital budgeting decision, where the NPV and IRR methods do not agree on which project should be selected, the manager should select A. the project which has the highest positive NPV. B. the project which has an IRR which is greater than the WACC, and if both meet this criteria, select the project with the highest IRR. C. since the IRR and NPV method disagree, select the project which will pay back the quickest. D. since the IRR and NPV methods disagree, it does not matter which quantitative method is used to make the selection. 7. All of the following influence capital budgeting cash flows EXCEPT A. the salvage value of the project B. the economic length of the project C. the projected sales revenue of the project D. costs that have previously been incurred that are unrecoverable. 8. J & B Inc. has $5 million of debt outstanding with a coupon rate of 12%. Currently the yield to maturity on these bonds is 14%. If the firm's tax rate is 40%, what is J&B's after tax cost of debt? A. 12% B. 14% C. 8.4% D. 5.6% 9. The cost of equity in the form of new common stock (external equity) will be higher than the cost of retained earnings (internal equity) because of A. the existence of taxes. B. the existence of flotation costs. C. the existence of restrictive covenants. D. investors
5. A capital budgeting project has a positive net present value. The internal rate of return of the project MUST A. be less than the cost of capital. B. be greater than the cost of capital. C. be equal to the cost of capital. D. be less than the payback period. 6. When the financial manger is faced with making a mutually exclusive capital budgeting decision, where the NPV and IRR methods do not agree on which project should be selected, the manager should select A. the project which has the highest positive NPV. B. the project which has an IRR which is greater than the WACC, and if both meet this criteria, select the project with the highest IRR. C. since the IRR and NPV method disagree, select the project which will pay back the quickest. D. since the IRR and NPV methods disagree, it does not matter which quantitative method is used to make the selection. 7. All of the following influence capital budgeting cash flows EXCEPT A. the salvage value of the project B. the economic length of the project C. the projected sales revenue of the project D. costs that have previously been incurred that are unrecoverable. 8. J & B Inc. has $5 million of debt outstanding with a coupon rate of 12%. Currently the yield to maturity on these bonds is 14%. If the firm's tax rate is 40%, what is J&B's after tax cost of debt? A. 12% B. 14% C. 8.4% D. 5.6% 9. The cost of equity in the form of new common stock (external equity) will be higher than the cost of retained earnings (internal equity) because of A. the existence of taxes. B. the existence of flotation costs. C. the existence of restrictive covenants. D. investors
Related questions
Capital budgeting criteria
A firm with a 14% WACC is evaluating two projects for this year's capital budget. After-tax cash flows, including depreciation, are as follows:
| 0 | 1 | 2 | 3 | 4 | 5 |
| Project A | -$3,000 | $1,000 | $1,000 | $1,000 | $1,000 | $1,000 |
| Project B | -$9,000 | $2,800 | $2,800 | $2,800 | $2,800 | $2,800 |
Calculate NPV for each project. Round your answers to the nearest cent.
Project A $ {C}
Project B $ {C}
Calculate IRR for each project. Round your answers to two decimal places.
Project A {C}%
Project B {C}%
Calculate MIRR for each project. Round your answers to two decimal places.
Project A {C}%
Project B {C}%
Calculate payback for each project. Round your answers to two decimal places.
Project A {C} years
Project B {C} years
Calculate discounted payback for each project. Round your answers to two decimal places.
Project A {C} years
Project B {C} years
Assuming the projects are independent, which one or ones would you recommend?
-Select-Only Project B would be accepted because NPV(B) > NPV(A).Both projects would be accepted since both of their NPV's are positive.Only Project A would be accepted because IRR(A) > IRR(B).Both projects would be rejected since both of their NPV's are negative.Only Project A would be accepted because NPV(A) > NPV(B).Item 11
If the projects are mutually exclusive, which would you recommend?
-Select-If the projects are mutually exclusive, the project with the highest positive IRR is chosen. Accept Project A.If the projects are mutually exclusive, the project with the highest positive MIRR is chosen. Accept Project A.If the projects are mutually exclusive, the project with the shortest Payback Period is chosen. Accept Project A.If the projects are mutually exclusive, the project with the highest positive IRR is chosen. Accept Project B.If the projects are mutually exclusive, the project with the highest positive NPV is chosen. Accept Project B.Item 12
Notice that the projects have the same cash flow timing pattern. Why is there a conflict between NPV and IRR?
-Select-The conflict between NPV and IRR is due to the relatively high discount rate.The conflict between NPV and IRR is due to the fact that the cash flows are in the form of an annuity.The conflict between NPV and IRR is due to the difference in the timing of the cash flows.There is no conflict between NPV and IRR.The conflict between NPV and IRR occurs due to the difference in the size of the projects.Item 13
