Question

1. Which of the following statements is CORRECT? A. One problem of the IRR method is...

1. Which of the following statements is CORRECT?

A. One problem of the IRR method is that it does not consider all cash flows of a project.

B. One problem of the IRR method is that it does not take into account the time value of money.

C. One problem of the IRR method is that it does not consider the reinvestment of cash inflows.

D. One problem of the IRR method is that a dollar received today is valued the same as a dollar to be received in the future.

E. One problem of the IRR method is that it assumes that the cash inflows are reinvested at the IRR, which assumption may not be reasonable.

2. A company has bonds outstanding that mature in 8 years, have a par value of $1,000, and have a coupon interest payment of $80 paid annually. The market interest rate is 7.1% per annum for these bonds. What is the bond's estimated price in the market?

A. $1,025.71

B. $983.78

C. $1,117.92

D. $1,053.53

E. $1,184.96

3. Which of the following statements is CORRECT?

A. The longer a project’s payback period, the better the project.

B. One problem with the payback method for evaluating projects is that it does not consider the time value of money.

C. If a project’s payback is positive, then the project should be rejected because it will also have a negative NPV.

D. The payback method considers the cash flows of a project beyond the payback period.

E. The authors of the textbook recommend the payback method as the best approach to evaluate capital investment proposals.

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Homework Answers

Answer #1

1. Correct option is E.

One problem of the IRR method is that it assumes that the cash inflows are reinvested at the IRR, which assumption may not be reasonable.

Other options are incorrect as the IRR method do considers all the cash flows and also considers the time value of money. It also considers that the cash inflows are reinvested.

--> It is one of the limitation of IRR as a method of capital budgeting technique that it considers that all the cash inflows of the project are reinvested at IRR only which is wrong.

Hence correct option is E.

Hope it clarifies!

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