Difficulties arise with the use of IRR for investment appraisal where: There is more than one sign change in the pattern of cashflows over a project’s life. The investment is mutually exclusive. There is a borrowing opportunity All of the above
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- Which of the following statements concerning the payback period, is not true? a. The payback period measures the time that a project will take to generate enough cash flows to cover the initial investment.incorrect b. the payback period involves a simple method c. the payback period takes into account the time value of money d. the payback period ignores cash flowsWhich of the following statements is CORRECT? O Projects with "normal" cash flows can have two or more real IRRS. O Projects with "normal" cash flows must have two changes in the sign of the cash flows, e.g., from negative to positive to negative. If there are more than two sign changes, then the cash flow stream is "nonnormal." O The "multiple IRR problem" can arise if a project's cash flows are "normal." O Projects with "nonnormal" cash flows are almost never encountered in the real world. O Projects with "normal" cash flows can have only one real IRR.Is it always necessary to adjust projects’ cash flows when different projects haveunequal lives? Explain.
- Which of the following statements are true regarding the payback period of an investment? It does not account for the time value of money No objective criteria exists for what is an acceptable payback period Cash flows occurring after the payback period have no impact on the payback computation All of the aboveWhich of the following cash flows should not be considered when evaluating a project? Changes in working capital Shipping and installation costs Sunk costs Opportunity costs ExternalitiesWhich of the following is an advantage of Net present value? a. Investment potential ignored b. Useful in evaluating mutually exclusive projects c. Considers time value of money d. Easy to calculate
- 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. I. One defect of the IRR method is that it does not take account of the time value of money. II. One defect of the IRR method is that it does not take account of the cost of capital. III. A project's IRR is the discount rate that causes the PV of the inflows to equal the project's cost. O I and III only SO I only O I, II and III O II and III only O III onlyWhy is it not always possible for the cash borrowed (released) from a project to be reinvested to yield a rate of return equal to that received from the project?Explain what is meant by the internal rate of return of an investment and discuss its relationship to the NPV of an investment. Explain the problems posed for the use of the IRR when it is necessary (i) to choose between two investments and when (ii) investments are characterised by negative net cash flows at the end of their lives. Discuss and evaluate the use of the payback period as an investment criterion.
- Which of the following is true of independent projects with conventional cash flow? O Due to time disparity NPV and IRR might make conflicting recommendations. Due to time disparity Pl and IRR might make conflicting recommendations. NPV and IRR will make the same accepts or reject recommendation. Due to size disparity NPV and IRR might make conflicting recommendations.Which of the following is/are true for the average accounting return method of project analysis? I. does not need a cutoff rate II. ignores time value of money II. is based on project's cash flows IV. easily obtainable information for computation Multiple Choice I only I, II, II, and IVWhich of the following statements is correct regarding the payback method? Takes account of differences in size among projects. If a project’s payback is positive, then the project should be accepted because it must have a zero NPV. Ignores cash flows beyond the payback period. Has an objective, market-determined benchmark for making decisions. Directly account for the time value of money.