Question Details

The NPV method's assumption that cash inflows are reinvested 


1.	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.
a.	True
b.	False
2.	For a project with one initial cash outflow followed by a series of positive cash inflows, the modified IRR (MIRR) method involves compounding the cash inflows out to the end of the project's life, summing those compounded cash flows to form a terminal value (TV), and then finding the discount rate that causes the PV of the TV to equal the project's cost.
a.	True
b.	False

3.	Which of the following statements is CORRECT?
a.	One defect of the IRR method is that it does not take account of cash flows over a project- full life.
b.	One defect of the IRR method is that it does not take account of the time value of money.
c.	One defect of the IRR method is that it does not take account of the cost of capital.
d.	One defect of the IRR method is that it values a dollar received today the same as a dollar that will not be received until sometime in the future.
e.	One defect of the IRR method is that it assumes that the cash flows to be received from a project can be reinvested at the IRR itself, and that assumption is often not valid.

4.	Assume a project has normal cash flows.  All else equal, which of the following statements is CORRECT?
a.	A project- IRR increases as the WACC declines.
b.	A project- NPV increases as the WACC declines.
c.	A project- MIRR is unaffected by changes in the WACC.
d.	A project- regular payback increases as the WACC declines.
e.	A project- discounted payback increases as the WACC declines.



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