Which of the following is a disadvantage of the internal rate of return method?

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Which of the following is a disadvantage of the IRR project evaluation method?

Select one:

a.

It does not take into account the time value of money.

b.

If there are negative cash flows after positive cash flows, there may be zero or multiple internal rates of return.

c.

It does not make adequate allowance for risk.

d.

It focuses on accounting profit rather than cash flow as the source of value.

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Terms in this set (49)

c

QN=1 (27099) Which method doest not belong to Time Adjusted Method or Discounted Cash Flow Method:
a. Net Present Value Method.
b. Internal Rate of Return Method.
c. Accounting rate of return Method.
d. All of these.

b

QN=2 (27086) A dollar today is worth than a dollar in one year's time because:
a. A dollar today can earn dividend while waiting for one year.
b. A dollar today can earn interest while waiting for one year.
c. A dollar today can earn gain while waiting for one year.
d. A dollar today can earn net income while waiting for one year.

b

QN=3 (27103) The discount rate that reduces to zero the net present value of a stream of income inflows and outflows. What is this?
a. Interest rate
b. Internal rate of return (IRR)
c. Rate of return
d. None of these

c

QN=4 (27105) Which statement is true:
a. The main disadvantage with the accounting rate of return-method is that it uses accounting numbers (instead of cash-flows) and does not consider cash flows of the whole project's life.
b. The main disadvantage with the accounting rate of return-method is that it uses accounting numbers (instead of cash-flows) and does not consider the accounting profit.
c. The main disadvantage with the accounting rate of return-method is that it uses accounting numbers (instead of cash-flows) and does not consider the time value of money.
d. None of these.

a

QN=5 (27093) The IRR is defined as:
a. The discount rate that makes the NPV equal to zero
b. The difference between the cost of capital and the present value of the cash flows
c. The discount rate used in the NPV method
d. The discount rate used in the discounted payback period method

c

QN=6 (27104) Which statement is true:
a. The PB method has the important advantage that the end result of the computations is expressed in dollars and not in a percentage.
b. The IRR method has the important advantage that the end result of the computations is expressed in dollars and not in a percentage.
c. The NPV method has the important advantage that the end result of the computations is expressed in dollars and not in a percentage.
d. None of these.

d

QN=7 (27107) Projects that are calculated as having negative NPVs should be:
a. depreciated over a longer time period.
b. charged less in overhead costs.
c. discounted using lower rates.
d. rejected or abandoned.

c

QN=8 (27096) NPV = 0 means:
a. Discounted interest rate is maximum
b. Discounted interest rate is minimum
c. Discounted interest rate is equal IRR
d. Discounted interest rate is greater than IRR

c

QN=9 (27088) Risk free rate using in discount technique can be obtained from:
a. Risk free loan
b. Risk free money
c. Risk free asset
d. All of these

b

QN=10 (27101) The length of time a firm must wait to recoup the money it has invested in a project is called:
a. The internal return (IRR)
b. The payback period
c. The profitability period
d. The discounted cash period

b

QN=11 (27106) Which statement is true:
a. The accounting rate of return-method do not consider the time value of money, and also ignores cash-flows that occur after the maximum pay-back time.
b. Pay-back methods do not consider the time value of money, and also ignores cash-flows that occur after the maximum pay-back time.
c. The internal rate of return method do not consider the time value of money, and also ignores cash-flows that occur after the maximum pay-back time.
d. None of these.

c

QN=12 (27098) Which project appraisal method is mentioned below:
Straight-line' method of estimating average returns from an investment, it uses accrual based financial statements instead of compounded or discounted cash flows.
a. NPV Method
b. IRR Method
c. ARR Method
d. PB Method

d

QN=13 (27090) Note on the calculation of IRR includes:
a. There are as many possible solution for the IRR as there are changes of sign.
b. A perticular structure of cash flows may have no IRR solution.
c. The Excel calculation of IRR has specific rules.
d. All of these.

a

QN=14 (27094) Project may be acceptable if:
a. NPV>=0
b. NPV < 0
c. NPV is equal to Discount interest
d. NPV is greater than Discount interest

c

QN=15 (27102) Which method provides more confidence, the payback method or the net present value method?
a. Payback because it provides a good timetable.
b. Payback because it tells you when you break even.
c. Net present value because it considers all inflows and outflows and the time value of money.
d. Net present value because it does not need to use cost of capital.

a

QN=16 (27091) The primary capital budgeting method that uses discounted cash flow techniques is the:
a. net present value method.
b. payback period method.
c. accounting rate of return method.
d. All of these.

b

QN=17 (27087) A future cash flow can be converted into present value using a suitable discount rate that is:
a. Risk free rate
b. Potential rate
c. High returned rate
d. Low returned rate

c

QN=18 (27089) Government bond is an example of:
a. Risk free loan
b. Risk free money
c. Risk free asset
d. None of these

a

QN=19 (27100)
(1) It does not measure the profitability of a project
(2) It does not value projects of different economic lives
(3) This method does not consider income beyond the pay-back period.
These are disadvantages of which project appraisal method:
a. Pay back Method.
b. Internal Rate of Return Method.
c. Accounting rate of return Method.
d. All of these.

c

QN=20 (27095) IRR is a rate at which:
a. NPV > 0
b. Discounted interest rate is minimum
c. NPV = 0
d. Discounted interest rate is maximum

c

QN=21 (27092) Which method provides more confidence, the payback method or the net present value method?
a. Payback because it provides a good timetable.
b. Payback because it tells you when you break even.
c. Net present value because it considers all inflows and outflows and the time value of money.
d. Net present value because it does not need to use cost of capital.

b

QN=22 (27097) With the same project, which statement is true:
a. The time needed to cover initial investment in Discounted payback (DPB) is less than payback (PB).
b. The time needed to cover initial investment in Discounted payback (DPB) is greater than payback (PB).
c. The time needed to cover initial investment in Discounted payback (DPB) is equal to payback (PB).
d. None of these.

c

QN=1 (27064) Which statement is the most correctable?
a. The Net Present Value and Internal Rate of Return decision rules consider the Time Value of Money.
b. The Net Present Value and Accounting Rate of Return decision rules consider all of the project's cash flows and the Time Value of Money.
c. The Net Present Value and Internal Rate of Return decision rules consider all of the project's cash flows and the Time Value of Money.
d. The Accounting rate of return and Internal Rate of Return decision rules consider all of the project's cash flows and the Time Value of Money.

d

QN=2 (27072) Which statement is true about net present value (NPV)?
a. the present value of the cash inflows minus the present
value of the cash outflows.
b. the future cash flows are discounted back over the life
of the investment.
c. the basic discount rate is usually the firm's cost of
capital (WACC).
d. All of these.

d

QN=3 (27063) A Capital Budgeting decision rule should satisfy the following criteria:
a. Must consider all of the project's cash flows.
b. Must consider the Time Value of Money.
c. Must always lead to the correct decision when choosing among Mutually Exclusive Projects.
d. All of these.

b

QN=4 (27061) Discounted cash flow anlysis includes:
a. Payback period (PP) and accounting rate of return (ARR)
b. Net present value (NPV) and internal rate of return (IRR)
c. Payback period (PP) and internal rate of return (IRR)
d. Accounting rate of return (ARR) and internal rate of return (IRR)

a

QN=5 (27062) The time it takes to recovers its initial investment. This is called:
a. Payback period (PP)
b. Accounting rate of return (ARR)
c. Net present value (NPV)
d. Internal rate of return (IRR)

d

QN=6 (27067) Net present value:
a. This is calculated by subtracting a project's net investment from the expected cash flows discounted at the firm's cost of capital.
b. This is calculated by subtracting a project's net investment from the expected net cash flows at the firm's cost of capital.
c. This is calculated by subtracting a project's net investment from the expected net cash flows discounted at the internal rate of return.
d. This is calculated by subtracting a project's net investment from the expected net cash flows discounted at the firm's cost of capital.

a

QN=7 (27076) Which statement is true:
a. Payback period is the period of time over which the accumulated cash flows will equal the initial outlay.
b. Payback period is the period of time over which the cash flows will equal the initial outlay.
c. Payback period is the period of time over which the accumulated cash flows will greater than the initial outlay.
d. None of these.

a

QN=8 (27065) Which appraisal method ignores the timing of cash flows?
a. The payback method
b. The net present value
c. The internal rate of return
d. All of these

a

QN=9 (27066) What two things does the payback method ignore?
a. timing of cash flows and cash flows after the payback period.
b. timing of cash flows.
c.cash flows after the payback period.
d. timing of cash flows and cash flows after the terminal period.

d

QN=10 (27081) Which one of these is the advantage of the pay back method in project appraisal:
a. Relatively easy to understand
b. Concentrate on earlier cash flows of a project
c. Simple to calculate
d. All of these

d

QN=11 (27075) One might use several evaluation techniques to assess a given project to measure different aspects of the project such as:
a. the payback period measures liquidity
b. the NPV measures the change in firm value
c. the IRR measures the rate of return on the initial outlay
d. all of these

c

QN=12 (27060) Which statement is true?
a. Generally, for project evaluation, discounted cash flow analysis (DCF) is as valuable as none discounted cash flow (NDCF) analysis.
b. Generally, for project evaluation, non-discounted cash flow analysis (NDCF) is prefer to discounted cash flow (DCF) analysis.
c. Generally, for project evaluation, discounted cash flow analysis (DCF) is prefer to none discounted cash flow (NDCF) analysis.
d. None of these.

d

QN=13 (27073) Which statement is true about Payback Period (PP)?
a. Easy to use
b. Emphasizes liquidity
c. One measure of the risk of an investment
d. All of these

a

QN=14 (27059) None discounted cash flow anlysis includes:
a. Payback period (PP) and accounting rate of return (ARR)
b. Net present value (NPV) and internal rate of return (IRR)
c. Payback period (PP) and internal rate of return (IRR)
d. Accounting rate of return (ARR) and internal rate of return (IRR)

c

QN=15 (27074) Fill in the blank:
The change in firm value associated with investment in a project is measured by the project's (..........)
a. Payback period
b. Discounted payback period
c. Net present value
d. Internal rate of return

d

QN=16 (27071) Which statement is true about Average Accounting Return (ARR):
a. Relatively easy to calculate
b. Uses accounting earnings, not cash flows
c. Ignores the timing of the earnings
d. All of these

d

QN=17 (27068) Under the payback period:
a. We compute the time required to recoup the original investment.
b. There is no consideration of inflows after the cutoff period.
c. The time value of money is ignored.
d. All of these are correct.

d

QN=18 (27080) Which one of these is NOT the advantage of the pay back method in project appraisal:
a. Relatively easy to understand
b. Concentrate on earlier cash flows of a project
c. Simple to calculate
d. Take account of all the project's cash flow

d

QN=19 (27069) The basic discount rate used in net present value analysis is:
a. The internal rate of return
b. The cost of common equity
c. The net discount rate
d. The cost of capital to the firm

b

QN=20 (27079) The NPV of a project can be calculated by which formula below:
a. Total project returns divided by initial investment
b. Present value of cash inflows and cash outflows
c. Total project time divided by project investment
d. Present value of project profit and losses

c

QN=21 (27077) In the financial appraisal of a project the criterion which does not consider the cash flows for the entire life of the project is:
a. Net Present Value
b. Internal Rate of Return
c. Payback period
d. None of these

a

QN=22 (27078) Which of the following is true about discounting future risk-free cash flows in the NPV rule:
a. A dollar today is worth more than a dollar tomorrow.
b. A risky dollar is worth more than a safe one.
c. None of the others.
d. A safe dollar is worth more than a risky one.

b

QN=23 (27070) The internal rate of return method:
a. Does not consider inflows after the cutoff period
b. Calculates the interest rate that equates outflows with subsequent inflows
c. Determines the time required to recoup the initial investment
d. Determines whether future benefits justify current expenditures

c

QN=1 (27084) To compute the required rate of return for equity in a company using the CAPM, it is necessary to know all of the following EXCEPT:
a. the risk-free rate.
b. the beta for the firm.
c. the earnings for the next time period.
d. the market return expected for the time period.

a

QN=2 (27085) The cost of common equity for a firm is
a. The required rate of return on the company's stock
b. The yield to maturity on the bond
c. The risk-free rate
d. The market risk premium

a

QN=3 (27082) rE = rF + β (rM - rF) (CAPM model).
Which statement is true about rM:
a. rM is the expected return on the market.
b. rM is the expected return of the owner.
c. rM is the risk free rate.
d. None of these.

d

QN=4 (27083) The factors that have impact on discounted rate (r) of a project is:
a. The risk as well as the profitability of the project.
b. Capital structure.
c. Expected profitability of each side involves.
d. All of these.

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