Chapter 11: The Basics of Capital Budgeting
36. 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.
A project’s regular IRR is found by compounding the initial cost at the WACC to find the terminal value (TV),
then discounting the TV at the WACC.
A project’s regular IRR is found by compounding the cash inflows at the WACC to find the present value
(PV), then discounting the TV to find the IRR.
If a project’s IRR is smaller than the WACC, then its NPV will be positive.
A project’s IRR is the discount rate that causes the PV of the inflows to equal the project’s cost.
If a project’s IRR is positive, then its NPV must also be positive.
11-3 Internal Rate of Return (IRR)
FOFM.BRIG.17.11.03 – Internal Rate of Return (IRR)
United States – BUSPROG.FOFM.BRIG.17.03 – BUSPROG: Analytic
United States – OH – DISC.FOFM.BRIG.17.03 – Capital budgeting and cost of capital
Multiple Choice: Conceptual
37. Which of the following statements is CORRECT?
If a project has “normal” cash flows, then its IRR must be positive.
If a project has “normal” cash flows, then its MIRR must be positive.
If a project has “normal” cash flows, then it will have exactly two real IRRs.
The definition of “normal” cash flows is that the cash flow stream has one or more negative cash flows
followed by a stream of positive cash flows and then one negative cash flow at the end of the project’s life.
If a project has “normal” cash flows, then it can have only one real IRR, whereas a project with “nonnormal”
cash flows might have more than one real IRR.
11-4 Multiple Internal Rates of Return
FOFM.BRIG.17.11.04 – Multiple Internal Rates of Return
United States – BUSPROG.FOFM.BRIG.17.03 – BUSPROG: Analytic
United States – OH – DISC.FOFM.BRIG.17.03 – Capital budgeting and cost of capital
United States – OH – DISC.FOFM.BRIG.17.03 – Capital budgeting and cost of capital
IRR
Bloom’s: Comprehension
Multiple Choice: Conceptual
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6/23/2015 3:26 PM