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The internal rate of return is defined as the:

A. maximum rate of return a firm expects to earn on a project.

B. discount rate which equates the net present value of cash inflows to the net present value of cash outflows to zero.

C. discount rate that causes the profitability index for a project to equal zero.

D. rate of return a project will generate if the project is financed solely with internal funds.

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Joshua Stredder
Joshua StredderLv10
22 Jan 2021

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The internal rate of return is defined as the:

A. maximum rate of return a firm expects to earn on a project.

B. discount rate which equates the net present value of cash inflows to the net present value of cash outflows to zero.

C. discount rate that causes the profitability index for a project to equal zero.

D. rate of return a project will generate if the project in financed solely with internal funds.

Which of the following are advantages of the payback method of project analysis? I. easy to use and understand II. considers the time value of money III. effectively handles investment risk IV. Uses income data rather than cash flow data

A. II, III, and IV only

B. I and III only

C. I and II only

D. II and III only

Which of the following is not a possible reason for conducting a post-audit review?

A. The post-audit review reduces the overall quality of future investment proposals.

B. The post-audit review helps identify those who consistently provide inaccurate estimates of cash flows.

C. The post-audit review allows the managers to stop unsuccessful projects, preventing excessive losses.

D. Managers who propose projects will be more careful before recommending a project.

True or false and why?
5. The internal rate of return (IRR) is such a discount ratethat ensures the sum of present value of the cash outflows (orcosts) with the sum of future value of the cash inflows.
6. A basic rule in capital budgeting is that if a projects NPVis larger than or equal to its IRR, then the project should beaccepted.

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.

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