Question

1. Multiple internal rates or return occur when:

Select one:

A. The project’s cash flows are larger earlier in the life of the project.

B. The project’s cash flows are larger later in the life of the project.

C. When the project’s cash flows experience normal cash flow streams (i.e. one sign change).

D. When the project’s cash flows experience non-normal cash flow streams (i.e. two or more sign changes).

E. When the IRR is equal to the WACC.

2. Which of the following is considered the best method for financial managers when deciding project approval/rejection?

Select one:

A. Payback method

B. Discounted payback

C. NPV

D. IRR

E. MIRR

3. Four of the following statements are truly disadvantages of the regular payback method, but one is not a disadvantage of this method. Which one is NOT a disadvantage of the payback method?

Select one:

A. Lacks an objective, market-determined benchmark for making decisions.

B. Ignores cash flows beyond the payback period.

C. Does not directly account for the time value of money.

D. Does not provide any indication regarding a project’s liquidity or risk.

E. Does not take account of differences in size among projects.

Answer 1

Solution 1.

The correct answer is (D).

Multiple internal rates of return occur when the project’s cash flows experience non-normal cash flow streams (i.e. two or more sign changes).

Solution 2.

The correct answer is (C).

NPV is considered as the best method as it gives us the present worth of the project as if its positive it is accepted and if it is negative it is rejected.

Solution 3.

The correct answer is (D).

Does not provide any indication regarding a project’s liquidity or risk.

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