- 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 statement best describes multiple IRR projects?
B. Projects that have more than one payback period are difficult to evaluate, since we don't know which period to use to evaluate the project.
C. Projects that have more than one internal rate of return are difficult to evaluate, since we don't know which rate to use to evaluate the project.
D. Projects that have more than one NPV are difficult to evaluate, since we don't know which rate to use.
A. Projects that have more than one cost of capital are difficult to evaluate, since we don't know which cost of capital to use to evaluate the project.
B. Projects that have more than one payback period are difficult to evaluate, since we don't know which period to use to evaluate the project.
C. Projects that have more than one internal rate of return are difficult to evaluate, since we don't know which rate to use to evaluate the project.
D. Projects that have more than one NPV are difficult to evaluate, since we don't know which rate to use.
Correct Answer: C
When projects have more than one internal rate of return, we say that there are multiple IRRs. There are circumstances in which one IRR will be less than the cost of capital while another (or more than one) will be higher. In this case, the first IRR would imply rejecting the project while the other IRR would indicate accepting it.
User Contributed Comments 3
| User | Comment |
|---|---|
| sarath | Multiple IRRs occur when we have non-normal cash flows...and it is difficult to choose one particular IRR. |
| gouthamks | What if both all IRRs obtained are greater than the cost of capital ? |
| Bududeen | it is not possible for both IRRs to be greater than the cost of capital...since if they do, the project would have been rejected anyway because of -ve NPV...think about bell shaped NPV profile. |