Question

9

the following are true/false

4)When the IRR serves as the discount rate, the net present value =$0

14) The first step when solving for the modified IRR (MIRR) is to calculate the present value of the cash inflows.

16) It is not fair to say that all capital budgeting methods have an accept-reject criterion.

17) a project costing $1000 and returning $450 annually for three will have a npv> $0 if the discount rate is =15%

18) If the discount rate is 15%, the profitability index of the project in #17 <1.

19) The project in #17 has a payback period < 2.5 years

20) When the NPV> $0, it is fair to assume that the IRR > the hurdle rate.

Answer 1

4) True
IRR is rate at which NPV is 0. Thus above statement is true

14) False
In calculating MIRR, Future value of cash inflow is to be determined
MIRR = (FV of cash inflow/PV of cash outflow)^1/n - 1

16) True
Yes it It is not fair to say that all capital budgeting methods have an accept-reject criterion. The are criteria like payback period where period in which initial outflow will be recovered is known

17) True
Statement showing NPV

Year	Cash flow	PVIF @ 15%	PV
	A	B	A x B
1	450	0.8696	391.30
2	450	0.7561	340.26
3	450	0.6575	295.88
PV of cash inflow	1027.45
PV of cash outflow	1000.00
NPV	27.45

Thus NPV > 0

18) False

Since NPV is positive PI will be > 1

PI = PV of cash inflow/PV of cash outflow

= 1027.45/1000

=1.02745

19) True

Payback period = Initial cash outflow/Annual cash inflow

= 1000/450

=2.22 years

20) True

Sin NPV is positive , IRR > Hurdle rate