# Question: 1 Which of the following statements about IRR and NPV

1. Which of the following statements about IRR and NPV is incorrect?

a. NPV and IRR yield the same ranking when evaluating projects.

b. NPV assumes that cash flows are reinvested at the cost of capital of the firm.

c. A project may have multiple IRRs when the sign of the cash flow changes more than once.

d. IRR is the discount rate that makes the NPV equal zero.

2. Which of the following would not happen if a firm uses WACC for all projects, regardless of the individual risks of the projects?

a. Accept a high-risk project with negative NPV

b. Reject a low-risk project with positive NPV

c. Accept an average-risk project with positive NPV

d. Reject a high-risk project with positive NPV

3. To estimate risk-adjusted discount rates, a firm could do all of the following, except:

a. Use the cost of capital ± risk premium method.

b. Regress the ROA of the project on the ROA of the whole firm.

c. Regress the ROA of the project on the ROA of the market index.

d. Use the pure play approach.

4. What is true about evaluating FDI compared with domestic projects?

a. We cannot use the NPV rule to evaluate FDI.

b. We cannot use IRR to evaluate FDI.

c. FDI has some unique risks.

d. FDI always has negative NPV.

5. Which is not the unique risk of FDI compared with domestic projects?

a. Interest rate risk

b. Political risk of expropriation or insurrection or the imposition of foreign exchange controls that prevent the firm’s getting its investment back

c. Potential legal and regulatory issues where local competitors may have privileged access to cronies in the government

d. Foreign exchange risk because cash flows are denominated in a foreign currency

6. What improvement does MIRR represent over traditional IRR?

a. It calculates the NPV of a project.

b. It relaxes the assumption that cash flows are reinvested at IRR.

c. It always gives the same accept/reject decision as IRR.

d. It always gives the same accept/reject decision as NPV.

7. In which of the following situations is MIRR likely to be greater than a calculated IRR?

a. Reinvestment rate is the same as the cost of capital.

b. Reinvestment rate is less than the cost of capital.

c. Reinvestment rate is greater than IRR.

d. A firm deposits cash flows in a zero-interest account.

a. NPV and IRR yield the same ranking when evaluating projects.

b. NPV assumes that cash flows are reinvested at the cost of capital of the firm.

c. A project may have multiple IRRs when the sign of the cash flow changes more than once.

d. IRR is the discount rate that makes the NPV equal zero.

2. Which of the following would not happen if a firm uses WACC for all projects, regardless of the individual risks of the projects?

a. Accept a high-risk project with negative NPV

b. Reject a low-risk project with positive NPV

c. Accept an average-risk project with positive NPV

d. Reject a high-risk project with positive NPV

3. To estimate risk-adjusted discount rates, a firm could do all of the following, except:

a. Use the cost of capital ± risk premium method.

b. Regress the ROA of the project on the ROA of the whole firm.

c. Regress the ROA of the project on the ROA of the market index.

d. Use the pure play approach.

4. What is true about evaluating FDI compared with domestic projects?

a. We cannot use the NPV rule to evaluate FDI.

b. We cannot use IRR to evaluate FDI.

c. FDI has some unique risks.

d. FDI always has negative NPV.

5. Which is not the unique risk of FDI compared with domestic projects?

a. Interest rate risk

b. Political risk of expropriation or insurrection or the imposition of foreign exchange controls that prevent the firm’s getting its investment back

c. Potential legal and regulatory issues where local competitors may have privileged access to cronies in the government

d. Foreign exchange risk because cash flows are denominated in a foreign currency

6. What improvement does MIRR represent over traditional IRR?

a. It calculates the NPV of a project.

b. It relaxes the assumption that cash flows are reinvested at IRR.

c. It always gives the same accept/reject decision as IRR.

d. It always gives the same accept/reject decision as NPV.

7. In which of the following situations is MIRR likely to be greater than a calculated IRR?

a. Reinvestment rate is the same as the cost of capital.

b. Reinvestment rate is less than the cost of capital.

c. Reinvestment rate is greater than IRR.

d. A firm deposits cash flows in a zero-interest account.

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