- CFA Exams
- CFA Level I Exam
- Topic 3. Corporate Issuers
- Learning Module 5. Capital Investments and Capital Allocation
- Subject 2. Capital Allocation
CFA Practice Question
Which of the following statements is false?
B. The IRR method states that accepting projects with IRRs that exceed their cost of capital decreases shareholders' wealth.
C. The NPV and IRR criteria always lead to the same accept/reject decision when projects are independent and each project has one IRR.
D. The NPV and the IRR can lead to different accept/reject decisions.
A. The NPV method states that investment projects with positive NPV should be accepted.
B. The IRR method states that accepting projects with IRRs that exceed their cost of capital decreases shareholders' wealth.
C. The NPV and IRR criteria always lead to the same accept/reject decision when projects are independent and each project has one IRR.
D. The NPV and the IRR can lead to different accept/reject decisions.
Correct Answer: B
When the IRR exceeds the cost of capital, the return on the project is higher than the cost of funds; therefore, shareholder wealth will increase.
User Contributed Comments 4
| User | Comment |
|---|---|
| smillis | For C -- "always the same": what if the project sizes are different...couldn't the IRR indicate reject with a positive NPV. |
| Charlie | For independent projects, the NPV and IRR methods make the same accept or reject decisions, irregardless of project sizes. |
| rt2007 | what about multiple IRR - they can still be there even when the projects are independent ? So isnt 'C' also false ? |
| vikram59 | The statement states one IRR |