Question

Please provide a thorough and detailed explanation. Please show formulas and calculations:

Evaluate each of the following statements to determine if they are ‘True’ or ‘False’.
(a) A one-year project costing $1,000 and with an IRR of 15% should be accepted.
(b) The PV of the cash flows of an eight-year project equals $580. If the discount rate is 8%, and the project costs $500 then it should be rejected.
(c) The payback period is most appropriate for projects with a long life.

Answer 1

Solution:

a) False

Because just on the basis of cost of project & IRR we can't evaluate the project.

To evaluate the project we should compare Cost of capital with IRR or Present worth of future cash flows with cost of project.

b)False

We e aluate project based on Net present value.

So NPV= present value of cash flows - cost of project I.r initial outflow

= $580 - $500

= $ 80

As NPV is positive project should be accepted.

3) False

Because payback period is suitable for projects with shorter duration and where projects are evaluated on the basis of liquidity.