Question

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. If Project A has a higher IRR than Project B, then Project A must also have a higher NPV.b. The IRR calculation implicitly assumes that all cash flows are reinvested at the cost of capital.c. The IRR calculation implicitly assumes that cash flows are withdrawn from the business rather than being reinvested in the business.d. If a project has normal cash flows and its IRR exceeds its cost of capital, then the project's NPV must be positive.e. If Project A has a higher IRR than Project B, then Project A must have the lower NPV.

Answer 1

Answer:

d. If a project has normal cash flows and its IRR exceeds its cost of capital, then the project's NPV must be positive

TRUE as the IRR makes the net present value match zero discount the projects cash flow at a lower rate will generate a positive NPV

Explanation:

a. If Project A has a higher IRR than Project B, then Project A must also have a higher NPV

FALSE there is a crossover rate at which Project B can achieve a higher present value below this threshold

b. The IRR calculation implicitly assumes that all cash flows are reinvested at the cost of capital

c. The IRR calculation implicitly assumes that cash flows are withdrawn from the business rather than being reinvested in the business

FALSE the IRR is the rate at which discounted future cash flow  matches initial cash outlay It does no assumption about wether the cash is reinvested or not.

If the cash is reinvested then another project must be considered with the use of this cash, it doesn't alter the judge for the current project profitability if later on, the company invest on better projects.

e. If Project A has a higher IRR than Project B, then Project A must have the lower NPV.

FALSE for reasons state on (a) there is a cossover rate at which below or above this threshold; one is preferrable over the other