Question

**Which of the following statements is
correct?**

**Group of answer choices**

Both the regular and the modified IRR (MIRR) methods have wide appeal to professors, but most business executives prefer the NPV method to either of the IRR methods.

The phenomenon called "multiple internal rates of return" arises when two or more independent projects that have different lives are compared to one another.

The IRR method is based on the assumption that projects' cash flows are reinvested at the project's risk-adjusted cost of capital.

Other things held constant, an increase in the cost of capital will result in an increase in a project's IRR.

The NPV method's assumption that cash inflows are reinvested at the cost of capital is generally more reasonable than the IRR's assumption that cash flows are reinvested at the IRR. This is an important reason why the NPV method is generally preferred over the IRR method.

Answer #1

Correct

The NPV method's assumption that cash inflows are reinvested at the cost of capital is generally more reasonable than the IRR's assumption that cash flows are reinvested at the IRR. This is an important reason why the NPV method is generally preferred over the IRR method.

The IRR method uses the assumption that the funds generated during the life of the project are reinvested at a rate equal to IRR, whereas the NPV assumes that these cash flows are invested at a rate equal to cost of capital

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.
The NPVs of relatively risky projects should be found using
relatively low costs of capital.
b.
If a project's NPV is greater than zero, then its IRR must be
less than the cost of capital.
c.
The higher the cost of capital used to calculate the NPV, the
lower the calculated NPV will...

Modified internal rate of return (MIRR)
The IRR evaluation method assumes that cash flows from the
project are reinvested at the same rate equal to the IRR. However,
in reality the reinvested cash flows may not necessarily generate a
return equal to the IRR. Thus, the modified IRR approach makes a
more reasonable assumption other than the project’s IRR.
Consider the following situation:
Fuzzy Button Clothing Company is analyzing a project that
requires an initial investment of $500,000. The project’s...

Grey company is analyzing a project that requires an initial
investment of $600,000. The project's expected cash flows are:
(Year 1) $350,000, (Year 2) -$125,000, (Year 3) $500,000 and (Year
4) $400,000.
1. Grey company's WACC is 10%, and the project has the same risk
as the firm's average project. Calculate this project's modified
internal rate of return (MIRR): _______%.
2. If Grey company's managers select projects based on the MIRR
criterion, they should accept or reject this
independent project....

The IRR evaluation method assumes that cash flows from the
project are reinvested at the same rate equal to the IRR. However,
in reality the reinvested cash flows may not necessarily generate a
return equal to the IRR. Thus, the modified IRR approach makes a
more reasonable assumption other than the project’s IRR.
Consider the following situation:
Blue Llama Mining Company is analyzing a project that requires
an initial investment of $450,000. The project’s expected cash
flows are:
Year
Cash...

4. Modified internal rate of return (MIRR)
The IRR evaluation method assumes that cash flows from the
project are reinvested at the same rate equal to the IRR. However,
in reality the reinvested cash flows may not necessarily generate a
return equal to the IRR. Thus, the modified IRR approach makes a
more reasonable assumption other than the project’s IRR.
Consider the following situation:
Cold Goose Metal Works Inc. is analyzing a project that requires
an initial investment of $500,000....

The IRR evaluation method assumes that cash flows from the
project are reinvested at the same rate equal to the IRR. However,
in reality the reinvested cash flows may not necessarily generate a
return equal to the IRR. Thus, the modified IRR approach makes a
more reasonable assumption other than the project’s IRR.
Consider the following situation:
Green Caterpillar Garden Supplies Inc. is analyzing a project
that requires an initial investment of $400,000. The project’s
expected cash flows are:
Year...

8. Modified internal rate of return (MIRR)
The IRR evaluation method assumes that cash flows from the
project are reinvested at the same rate equal to the IRR. However,
in reality the reinvested cash flows may not necessarily generate a
return equal to the IRR. Thus, the modified IRR approach makes a
more reasonable assumption other than the project's IRR.
Consider the following situation :
Cute Camel Woodcraft Company is analyzing a project that
requires an initial investment of $3,225,000....

The IRR evaluation method assumes that cash flows from the
project are reinvested at a rate equal to the project’s IRR.
However, in reality, the reinvested cash flows may not necessarily
generate a return equal to the IRR. Thus, using the modified IRR
approach, you can make a more reasonable estimate of a project’s
rate of return than the project’s IRR can.
Consider the following situation:
Cold Goose Metal Works Inc. is analyzing a project that requires
an initial investment...

1. Which of the following statements is correct?
a. A project with conventional cash flows is one with an initial
cash outflow followed by one or more cash inflows.
b. The NPV method determines how much the future value of cash
inflows exceeds the present value of costs.
c. All the answers are correct.
d. When two projects are independent, accepting one project
implicitly eliminates the other.
e. Conventional cash flow patterns could lead to conflicting
decisions by NPV and...

Which of the following is false?
Group of answer choices
A project’s IRR increases as the cost of capital increases.
A project’s payback does not respond to changes in the cost of
capital.
NPV-IRR conflict can be caused by scale differences.
The x-axis intercept of an NPV profile is the project’s IRR.
The modified IRR involves compounding all cash inflows to the
terminal year, or the end of the project’s life at the cost of
capital.

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