Question

Which of the following statements are correct?

a. Consider a project that generates a negative cash flow in year 0 and a positive cash flow in year 1. The NPV rule will always lead to the same decision for this project as the IRR rule.

b. Higher NPV projects have longer payback periods.

c. Two projects with identical expected cash flows but different risk profiles have the same IRR. d. IRR is affected by the scale of the investment opportunity.

Answer 1

A) Consider a project that generates a negative cash flow in year 0 and a positive cash flow in year 1. The Npv rule will always lead to the same decision for this project as the IRR rule.

C) Two projects with identical expected cash flows but different risk profiles have the same IRR

Explanation:

Option 1 is right in all the case , except when there is change in sign in cash flows.

Option 2 is wrong because if the Npv is high then the initial cash flow will be higher , so the payback period should be short and not long.

Option 3 is right because the IRR does not take into consideration any external factor or risk. Irr just needs cash flow to be calculated , so the IRR of the identical cash flows will be same.

Option 4 is wrong as the Irr is unaffected by the scale of investment opportunity.