1. Which statement is CORRECT? a) The IRR method assumes that Cash flows are rei
ID: 2769029 • Letter: 1
Question
1. Which statement is CORRECT?
a) The IRR method assumes that Cash flows are reinvested at the firm’s WACC
b) The use of Accelerated Depreciation methods (instead of Straight-Line) results in higher operating cash flows in a projects early years.
c) For independent projects with normal cash flows, the NPV, Payback and IRR methods will always lead to the same decision.
d) For normal projects, lower costs of capital lead to lower NPVs.
Please give explanation behind your answer. It should be correct, I have correct answer with me, I will give thumbs up only for correct answer.
Explanation / Answer
Answer
1. Which statement is CORRECT?
Answer : c) For independent projects with normal cash flows, the NPV, Payback and IRR methods will always lead to the same decision.
Explanation:
When a project is an independent project, meaning the decision to invest in a project is independent of any other projects, The NPV, Payback and IRR will always give the same result, either rejecting or accepting a project.
If cash flows are discounted at k1, NPV is positive and IRR > k1: accept project.
If cash flows are discounted at k2, NPV is negative and IRR < k2: reject the project.
The payback period is the length of time required to recover the cost of an investment. The payback period of a given investment or project is an important determinant of whether to undertake the position or project, as longer payback periods are typically not desirable for investment positions.
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