Question

In 2008, a project requires an initial cost of -$250 and next year, in 2009, the investor receives $570 and the year after that, in 2010, the cash flows from the investment is -$120. What is the total number of IRRs in this project?

		1
		0
		2
		3

What is the NPV of a project if IRR < discount rate (Assuming that the first cash flow is negative and all of the cash flows from the project are positive)?

		< 0
		> 0
		= 0
		None

Which of the following method must be preferred if the number changes in the signs of future cash flows within the project’s economic life is more than one?

		IRR
		Payback Period
		Discounted Payback Period
		NPV

Answer 1

Answer to 1st Question

We see that the cash flows change from negative to positive and then again negative from year 0,1 and 2 respectively. Therefore the cash flows change signs more than once through out its life. In cases where signs of future cash flows within the project's economic life is more than 1 then the IRR of the prohect is more than 1.

Answer to 2nd Question

If Internal Rate Return of the project is greater than the discount rate then the NPV of the project is poitive and greater than 0

If Internal Rate Return of the project is less than the discount rate then the NPV of the project is negative and less than 0.

Discount rate is the monimum required rate of return whereas IRR is the return of the project where NPV is 0.

If IRR = Discount Rate then NPV of the project is 0

Answer to 3rd Question

When the Cash flows of a project change sign more than once throughout the life of the project then IRR of the project will be more than 1 and similarly Payback and Discounted Payback period will be more than 1.

Therefore in such instances, NPV Descsion rule should be preffered over IRR, Payback and Discounted Payback