Chapter-11-PracticeProblems (1)

# Chapter-11-PracticeProblems (1) - Practice Problems Chapter...

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Practice Problems – Chapter 11 (11-5) Reinvestment rate assumption F I Answer: a EASY 1. The NPV method's assumption that cash inflows are reinvested at the cost of capital is generally more reasonable than the IRR's assumption that cash flows are reinvested at the IRR. This is an important reason why the NPV method is generally preferred over the IRR method. a. True b. False (11-6) Modified IRR F I Answer: a EASY 2. For a project with one initial cash outflow followed by a series of positive cash inflows, the modified IRR (MIRR) method involves compounding the cash inflows out to the end of the project's life, summing those compounded cash flows to form a terminal value (TV), and then finding the discount rate that causes the PV of the TV to equal the project's cost. a. True b. False (11-3) IRR C I Answer: e EASY 3. Which of the following statements is CORRECT? a. One defect of the IRR method is that it does not take account of cash flows over a project’s full life. b. One defect of the IRR method is that it does not take account of the time value of money. c. One defect of the IRR method is that it does not take account of the cost of capital. d. One defect of the IRR method is that it values a dollar received today the same as a dollar that will not be received until sometime in the future. e.

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Chapter-11-PracticeProblems (1) - Practice Problems Chapter...

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