Determine whether the following statements are true or false:
-The internal rate of return will equal the discount rate when the net present value equals zero.
-The main disadvantage of the NPV method is the need for detailed, long-term forecasts of free cash flows generated by prospective projects.
-The modified internal rate of return represents the project's internal rate of return assuming that intermediate cash flows from the project can be reinvested at the project's required return.
-Using the weighted cost of capital as a cutoff rate assumes that the riskiness of the project being evaluated is similar to the riskiness of the company's existing assets.
-When several sign reversals in the cash flow stream occur, a project can have more than one IRR.
Determine whether the following statements are true or false:
-The internal rate of return will equal the discount rate when the net present value equals zero.
-The main disadvantage of the NPV method is the need for detailed, long-term forecasts of free cash flows generated by prospective projects.
-The modified internal rate of return represents the project's internal rate of return assuming that intermediate cash flows from the project can be reinvested at the project's required return.
-Using the weighted cost of capital as a cutoff rate assumes that the riskiness of the project being evaluated is similar to the riskiness of the company's existing assets.
-When several sign reversals in the cash flow stream occur, a project can have more than one IRR.
Related questions
If projects are mutually exclusive, only one project can be chosen. The internal rate of return (IRR) and the net present value (NPV) methods will not always choose the same project. If the crossover rate on the NPV profile is below the horizontal axis, the methods will _____________ agree.
Projects Y and Z are mutually exclusive projects. Their cash flows and NPV profiles are shown as follows
| Year | Project Y | Project Z |
| 0 | -1,500 | -1,500 |
| 1 | 200 | 900 |
| 2 | 400 | 600 |
| 3 | 600 | 300 |
| 4 | 1000 | 200 |
If the weighted average cost of capital (WACC) for each project is 10%, do the NPV and IRR methods agree or conflict?
a. The methods conflict.
b. The methods agree
A key to resolving this conflict is the assumed reinvestment rate. The NPV calculation implicitly assumes that intermediate cash flows are reinvested at the assumes that the rate at which cash flows can be reinvested is the, and the IRR calculation. As a result, when evaluating mutually exclusive projects, the________ is usually the better decision criterion.
