Question

Which of the following statements is true?

1. We can use NPV to evaluate two mutually exclusive repeated projects

2. To make an investment decision based on IRR, we do not need to know the appropriate discount rate

3. We can use profitability index to evaluate mutually exclusive project

4. For a given project, NPV and Discounted Payback Period will reach the same decision if the targeted time is infinity

5. When comparing two mutually exclusive projects using IRR, we should always pick the one with a higher IRR

Answer 1

1.) True, we can use NPV to evaluate two mutually exclusive repeated projects as long as we do have their cashflows and discount rate available to us. NPV can be used.

2.) False. To calculate the value of IRR, we do not need the discount rate, but to take decision on the basis of IRR, we need discount rate or minimum reuired rate to compare and take the decision.

3)True . We can use profitability Index to evaluate mutually exclusive projects. The project with the higher profitability Index would be selected.

4) False. For a given project, NPV and discounted payback period will not reach the same decision all the time while evaluating mutually exclusive projects. Some time they might agree on the same projects but not all the time.

5) True. When comparing two mutually exclusive projects using IRR, we should pick the one with the higher IRR. Higher IRR indicates higher return on reinvested capital.