Question

Which of the following statements is FALSE? O A. The NPV will be positive if the IRR is less than the cost of capital O B. The IRR can be positive even if the NPV is negative OC. The NPV method is not affected by the multiple IRR problem. OD. If the multiple IRR problem does not exist, any independent project acceptable by NPV method will also be acceptable by the IRR method. O E. When IRR = k (the cost of capital), NPV = 0.

Answer 1

ANSWER :

A. The NPV will be positive if the IRR is less than the cost of Capital.

The above statement is not true , because:

NPV is the Sum of Present values of cash flows discounted at the cost of capital

IRR is the discount rate at which NPV=0

Hence , if the Cost of capital is less than IRR , the NPV will be positive

If IRR is less than Cost of capital, NPV will be negative

Assume

Cash Flow in Year0=-100

Cash Flow in Year 1=80

Cash Flow in Year 2=80

Cost of Capital =15%

NPV=-100+80/1.15+80/(1.15^2)=30.06

NPV is positive

IRR for the above =38%

IRR is above Cost of Capital , Hence NPV is positive

If Cost of Capital is45% (IRR less than Cost of capital),

NPV=-100+80/1.45+80/(1.45^2)=-6.78

NPV is negatve

B.From the above example it is clear that IRR can be positive even if NPV is negative

NPV is -6.78 (with discount rate=45%), but IRR is positive 38%

C.NPV gives only one figure . It is not affected by multiple values

D.True, If Multiple IRR proble did not exist, any Positive NPV will give IRR higher than Required Return

E.. True. IRR is the discount rate at which NPV=0