Hollister, Inc. is currently considering an eight-year project that has an initial outlay or cost of $120,000. The future cash inflows from its project for years 1 through 8 are the same at $30,000. Hollister has a discount rate of 11%. Because of capital rationing (shortage of funds for financing), Hollister wants to compute the […]
Dakota, Inc. is currently considering an eight-year project that has an initial outlay or cost of $140,000. The cash inflows from its project for years 1 through 8 are the same at $35,000. Dakota has a discount rate of 12%. Because there is a shortage of funds to finance all good projects, Dakota wants to […]
A firm’s capital structure can significantly affect the firm’s value by affecting its risk and return. Indicate whether the statement is true or false ANSWER TRUE
One problem with the decision criterion of IRR is that if cash flow is not standard, there is a possibility of multiple IRRs for a single project. Indicate whether the statement is true or false. ANSWER Answer: TRUE
The crossover rate is the discount rate where both projects have the same ________. A) IRR B) PI C) NPV D) length to completion ANSWER Answer: C
Pandora, Inc. is considering a five-year project that has an initial outlay or cost of $70,000. The cash inflows from its project for years 1, 2, 3, 4 and 5 are all the same at $14,000. The borrowing costs are 10%. What is the IRR? Should Pandora use the IRR method to evaluate this project? […]
Which of the following in NOT a potential problem suffered by the IRR method of capital budgeting? A) Multiple IRRs B) Disagreement with the NPV as to whether a project with ordinary cash flows is profitable or not C) Incorporates the IRR as the reinvestment rate for the future cash flows D) Comparing mutually exclusive […]
Spotify, Inc. is considering a five-year project that has an initial outlay or cost of $22,000. The future cash inflows from its project for years 1, 2, 3, 4 and 5 are $15,000, $15,000, $15,000, $15,000 and -$41,000, respectively. Compute both IRRs. Given these IRRs, compute the two NPVs. If Spotify’s true cost of borrowing […]
All items on the right-hand side of a firm’s balance sheet, excluding current liabilities are sources of capital. Indicate whether the statement is true or false ANSWER TRUE
One of the underlying assumptions of the IRR model is that all cash inflow can be reinvested at the individual project’s internal rate of return (IRR) over the remaining life of the project. Indicate whether the statement is true or false. ANSWER Answer: TRUE
