Question

18. Which of the following is NOT true about the internal rate of return: A) A good project is one with IRR greater than the required return. B) IRR is the discount rate that results in a zero net present value for the project. C) Crossover rate for two projects is the IRR of the project with the difference of the cash flows of the two projects.. D) For two projects of the same size, IRR will usually choose the same project as NPV. E) The equation for IRR always has only one solution. 19. When the present value of the cash inflows exceeds the initial cost of a project, then the project should be: A) accepted because the payback period is less than the required time period. B) accepted because the profitability index is greater than 1. C) accepted because the profitability index is negative. D) rejected because the internal rate of return is negative. E) rejected because the net present value is positive.

Answer 1

18. The correct answer to the question is (D). The NPV method assumes that cash flow from the project can be invested at a rate which is equal to the cost of capital, while IRR method assumes that cash flows can be invested at project's IRR. This will result in a conflict between IRR and NPV as to which projects to select.

19. The correct answer is (B). The formula for Profitability index is PVIF / PVOF, where PVIF is present value of cash inflows, while PVOF is present value of cash outflow. If PVIF exceeds PVOF, then it will have a profitability index of greater than 1.