1. FIN 534 Week 7 Quiz 6
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Finance 534 Week 7 quiz 6
Question 1
Which of the following statements is CORRECT?
Question 2
Which of the following statements is CORRECT?
Question 3
Assume that the economy is in a mild recession, and as a result interest rates
and money costs generally are relatively low. The WACC for two mutually
exclusive projects that are being considered is 8%. Project S has an IRR of 20%
while Project L's IRR is 15%. The projects have the same NPV at the 8% current
WACC. However, you believe that the economy is about to recover, and money
costs and thus your WACC will also increase. You also think that the projects will
not be funded until the WACC has increased, and their cash flows will not be
affected by the change in economic conditions. Under these conditions, which of
the following statements is CORRECT?
Question 4
Four of the following statements are truly disadvantages of the regular payback
method, but one is not a disadvantage of this method. Which one is NOT a
disadvantage of the payback method?
Question 5
Which of the following statements is CORRECT?
Question 6
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.

2. Question 7
Which of the following statements is CORRECT?
Question 8
Which of the following statements is CORRECT?
Question 9
Which of the following statements is CORRECT?
Question 10
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.
Question 11
Which of the following statements is CORRECT?
Question 12
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.
Question 13
Assume that the economy is enjoying a strong boom, and as a result interest
rates and money costs generally are relatively high. The WACC for two mutually
exclusive projects that are being considered is 12%. Project S has an IRR of
20% while Project L's IRR is 15%. The projects have the same NPV at the 12%
current WACC. However, you believe that the economy will soon fall into a mild
recession, and money costs and thus your WACC will soon decline. You also
think that the projects will not be funded until the WACC has decreased, and their
cash flows will not be affected by the change in economic conditions. Under
these conditions, which of the following statements is CORRECT?
Question 14
Which of the following statements is CORRECT?
Question 15
Which of the following statements is CORRECT?

3. Question 16
The relative risk of a proposed project is best accounted for by which of the
following procedures?
Question 17
Which of the following statements is CORRECT?
Question 18
Rowell Company spent $3 million two years ago to build a plant for a new
product. It then decided not to go forward with the project, so the building is
available for sale or for a new product. Rowell owns the building free and clear--
there is no mortgage on it. Which of the following statements is CORRECT?
Question 19
Which of the following should be considered when a company estimates the cash
flows used to analyze a proposed project?
Question 20
Which of the following statements is CORRECT?
Question 21
A company is considering a new project. The CFO plans to calculate the
project’s NPV by estimating the relevant cash flows for each year of the project’s
life (i.e., the initial investment cost, the annual operating cash flows, and the
terminal cash flow), then discounting those cash flows at the company’s overall
WACC. Which one of the following factors should the CFO be sure to INCLUDE
in the cash flows when estimating the relevant cash flows?
Question 22
Which of the following factors should be included in the cash flows used to
estimate a project’s NPV?
Question 23
Which of the following rules is CORRECT for capital budgeting analysis?
Question 24
Currently, Powell Products has a beta of 1.0, and its sales and profits are
positively correlated with the overall economy. The company estimates that a
proposed new project would have a higher standard deviation and coefficient of

4. variation than an average company project. Also, the new project’s sales would
be countercyclical in the sense that they would be high when the overall economy
is down and low when the overall economy is strong. On the basis of this
information, which of the following statements is CORRECT?
Question 25
Which of the following statements is CORRECT?
Question 26
Which of the following procedures does the text say is used most frequently by
businesses when they do capital budgeting analyses?
Question 27
A firm is considering a new project whose risk is greater than the risk of the firm’s
average project, based on all methods for assessing risk. In evaluating this
project, it would be reasonable for management to do which of the following?
Question 28
When evaluating a new project, firms should include in the projected cash flows
all of the following EXCEPT:
Question 29
Which of the following is NOT a relevant cash flow and thus should not be
reflected in the analysis of a capital budgeting project?
Question 30
Suppose Tapley Inc. uses a WACC of 8% for below-average risk projects, 10%
for average-risk projects, and 12% for above-average risk projects. Which of the
following independent projects should Tapley accept, assuming that the company
uses the NPV method when choosing