1. What is the best approach to take into account of the relative risk of a proposed project?
ignoring risk because project risk cannot be measured accurately
reducing the NPV by 10% for risky projects
picking a risk factor equal to the average discount rate
adjusting the discount rate upward if the project is judged to have above-average risk
2. 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.
If Project A has a higher IRR than Project B, then Project A must have the lower NPV.
The IRR calculation implicitly assumes that all cash flows are reinvested at the WACC.
If Project A has a higher IRR than Project B, then Project A must also have a higher NPV.
If a project has normal cash flows and its IRR exceeds its WACC, then the project’s NPV must be positive.