CFA CFA Level 1 Question of the Week – IRR and NPV

Question of the Week – IRR and NPV

  • Author
    Posts
    • exam_whiz
      Participant
      Up
      2
      Down

      Which of the following statements regarding Internal Rate of Return (IRR) and Net Present Value (NPV) is/are most likely correct? 

      1: If the NPV and IRR methods give conflicting decisions for mutually exclusive projects, the IRR method should be used to select the project. 
      2: A project may have positive NPV even if its IRR is less than the cost of capital 
      3: IRR is the discount rate at which the NPV of the project is zero. 
      4: A project’s IRR can be positive even if the NPV is negative.
      • Both statements 1 and 2 are correct
      • Both statements 3 and 4 are correct
      • Statements 2, 3 and 4 are correct
    • jmsatchwell
      Participant
      Up
      2
      Down

      Wish I could change that answer…

    • exam_whiz
      Participant
      Up
      5
      Down

      I will let you change it in my book!  

      Correct Answer: B

      IRR is the discount rate at which the NPV of the project is zero. If the IRR is less than the cost of capital, the project’s NPV will be negative, even though IRR is positive. Thus, both statements 3 and 4 are correct.

      If the NPV and IRR methods give conflicting decisions for mutually exclusive projects, the project with greatest positive NPV should be selected. A project cannot have positive NPV if its IRR is less than the cost of capital. Thus, statements 1 and 2 are incorrect.

    • shannondaily
      Participant
      Up
      1
      Down

      Woo! I got it right. 🙂 

Viewing 3 reply threads
  • You must be logged in to reply to this topic.