Evaluation of investment projects

Which of the following statements is most correct?. The NPV method assumes that cash flows will be reinvested at the risk-free rate, while the IRR method assumes reinvestment at the IRR. The NPV method assumes that cash flows will be reinvested at the cost of capital, while the IRR method assumes reinvestment at the IRR. The NPV method assumes that cash flows will be reinvested at the cost of capital, while the IRR method assumes reinvestment at the risk-free rate. The NPV method does not consider the inflation premium.

Which of the following statements is CORRECT?. One defect of the IRR method is that it assumes that the cash flows to be received from a project can be reinvested at the IRR itself, and that assumption is often not valid. One defect of the IRR method is that it does not take account of cash flows over a project’s full life. One defect of the IRR method is that it does not take account of the time value of money. One defect of the IRR method is that it does consider the time value of money.

Assume a project has normal cash flows. All else equal, which of the following statements is CORRECT?. The project’s IRR increases as the WACC declines. The project’s NPV increases as the WACC declines. The project’s regular payback increases as the WACC declines. The project’s MIRR is unaffected by changes in the WACC.

With respect to payback method, which of the following sentences are correct?. It is not very useful as an indicator of risk. Ignores cash flows beyond the payback period. Does not directly account for the time value of money.

Which of the following statements is most correct?. If a project’s internal rate of return (IRR) exceeds the cost of capital, then the project’s net present value (NPV) must be positive. If Project A has a higher IRR than Project B, then Project A must also have a higher NPV. The IRR calculation implicitly assumes that all cash flows are reinvested at a rate of return equal to the cost of capital.

A Company has a capital structure which is based on 30 percent debt, 10 percent preferred stock, and 60 percent common stock. The pre-tax cost of debt is 8 percent, the cost of preferred is 9 percent, and the cost of common stock is 11 percent. The company's tax rate is 34 percent. The company is considering a project that is equally as risky as the overall firm. This project has initial costs of $250,000 and cash inflows of $94,000 a year for three years. What is the projected net present value of this project?. 12,114. -12,114. 11,214. -11,214.

A Company is considering a new project they consider to be a little riskier than their current operations. Thus, management has decided to add an additional 2.5 percent to their company's overall cost of capital when evaluating this project. The project has an initial cash outlay of $30,000 and projected cash inflows of $12,000 in year one, $20,000 in year two, and $8,000 in year three. The firm uses 40 percent debt and 60 percent common stock as their capital structure. The company's cost of equity is 14 percent while the aftertax cost of debt for the firm is 7 percent. What is the projected net present value of the new project?. 1,647. 1,467. 1,674. 1,746.