Question

17

18

A film must choose from six capital budgeting proposals outlined below. The firm is subject to capital rationing and has a capital budget of $1,000,000, the firm's cost of capital is 15 percent. A firm must choose from six capital budgeting proposals outlined below. The firm is subject to capital rationing and has a capital budget of $1.000.000, the few's cost of capital is 15 percent

The internal rate of return assumes that intermediate cash inflows are invested at a rate equal to the firm's cost of capital. 

Answer 1

Question 17

Option	Correct/Incorrect	Reason
A.	Correct	This option has all the characterstics:- 1) Cost within the funds available 2) IRR is more than the cost of capital 3) NPV of projects is positive
B.	Incorrect	Out of all the projects, project 4 IRR rate is less than firm's cost of capital and NPV is also negative. Hence selecting this project is loosing money. Thus this option is incorrect.
C.	Incorrect	Cost of this option is more than the funds available. Since the cost arrives to 300000+400000+250000+150000 = 1100000. The cost is more than funds available of 1000000
D.	Incorrect	Out of all the projects, project 4 IRR rate is less than firm's cost of capital and NPV is also negative. Hence selecting this project is loosing money. Thus this option is incorrect.

Question 18

• The IRR has a reinvestment rate assumption that assumes that the company will reinvest cash inflows at the IRR's rate of return for the lifetime of the project.
• If this reinvestment rate is too high to be feasible, then the IRR of the project will fall.

Thus it incorrect that intermediate cash flows are reinvested at firm's cost of capital.

This statement is false.