Answered: Which of the following statements is…

Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter11: Cash Flow Estimation And Risk Analysis

Section11.1: Identifying Relevant Cash Flows

Problem 3ST

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Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.

a. If Project A has a higher IRR than Project B, then Project A must also have a higher NPV.

b. If a project has normal cash flows and its IRR exceeds its cost of capital, then the project's NPV must be positive.

c. The IRR calculation implicitly assumes that all cash flows are reinvested at the cost of capital.

d. If Project A has a higher IRR than Project B, then Project A must have the lower NPV.

e. The IRR calculation implicitly assumes that cash flows are withdrawn from the business rather than being reinvested in the business.

Definition Definition Calculation used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. NPV is calculated as the difference between the present value of cash inflow and cash outflow. NPV is used for capital budgeting and investment planning as well as to compare similar investment alternatives.

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