Assuming that a firm’s cost of capital is constant, the NPV and IRR methods for evaluating independent projects will produce the same results, at least in terms of accept/reject decisions.
a. true
b. false
You are considering two projects. Project A is a five year project and project B is a 15 year project. The projects have normal cash flows and the same (positive) NVP at k=10%, which would have the higher NVP at 15%.
a. Project A
b. Project B
c. They would still be the same
d. More information is needed to determine
The phenomenon called “multiple internal rates of return” arises when two or more mutually exclusive projects which have different lives are being compared.
a. True b. False
Other things held constant, an increase in the cost of capital will result in a decrease of a project’s IRR.
a. True b. False
The underlying cause of ranking conflicts between the NVP and IRR methods is:
a. Differing initial costs
b. Differing reinvestment rate assumptions
c. Differing cash flow timing
d. Differing profitability indices
e. All of the above cause ranking conflicts
Find the NVP and IRR of the project shown below. The cost of capital is 12%.
Periods 0 1 2 3
-$4,354 $1,000 $2,000 $3,000