1215

If a project has a negative cash flow during its life or at the end of its life, the project most likely has:

A) a negative internal rate of return.

B) more than one internal rate of return.

C) multiple net present values.

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Projects with unconventional cash flows (where the sign of the cash flow changes from minus to plus to back to minus) will have multiple internal rates of return. However, one will still be able to calculate a single net present value for the cash flow pattern.

1215

Which of the following statements regarding the internal rate of return (IRR) is most accurate? The IRR:

A) can lead to multiple IRR rates if the cash flows extend past the payback period.

B) and the net present value (NPV) method lead to the same accept/reject decision for independent projects.

C) assumes that the reinvestment rate of the cash flows is the cost of capital.

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NPV and IRR lead to the same decision for independent projects, not necessarily for mutually exclusive projects. IRR assumes that cash flows are reinvested at the IRR rate. IRR does not ignore time value of money (the payback period does), and the investor may find multiple IRRs if there are sign changes after time zero (i.e., negative cash flows after time zero).