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d. The net present value method (NPV) is generally regarded by
academics as being the best single method for evaluating capital
budgeting projects.
e. The modified internal rate of return method (MIRR) is generally
regarded by academics as being the best single method for evaluating
capital budgeting projects.
2. Projects A and B have identical expected lives and identical initial
cash outflows (costs). However, most of one project’s cash flows come
in the early years, while most of the other project’s cash flows occur in
the later years. The two NPV profiles are given below:
Which of the following statements is CORRECT?
a. More of Project A’s cash flows occur in the later years.
b. More of Project B’s cash flows occur in the later years.
c. We must have information on the cost of capital in order to determine
which project has the larger early cash flows.
d. The NPV profile graph is inconsistent with the statement made in the
problem.
e. The crossover rate, i.e., the rate at which Projects A and B have the
same NPV, is greater than either project’s IRR.
3. Suppose a firm relies exclusively on the payback method when
making capital budgeting decisions, and it sets a 4-year payback
regardless of economic conditions. Other things held constant, which of
the following statements is most likely to be true?