### CFA Practice Question

There are 233 practice questions for this study session.

### CFA Practice Question

Company A is considering a capital investment project. The appropriate discount rate for the project is WACC = 5%. The project has the following NPV and IRR: NPV = \$50,000, IRR = 6.5%.

Which of the following statements is (are) true?

I. If all cash flows for the project are reinvested to earn 6.5%, then the project's realized return will equal its IRR.
II. If all cash flows for the project are reinvested to earn actually more than 6.5%, then the project's realized return will exceed its IRR.
III. If all cash flows for the project are reinvested to earn actually less than 6.5%, then the project's realized return will be less than its IRR.
Correct Answer: I, II and III

IRR calculation for a capital investment project assumes that all cash flows can be reinvested to earn exactly the IRR. If the cash flows are invested at a rate lower than the IRR, the realized return will be less than the IRR. If, however, the cash flows are invested at a rate higher than the IRR, the realized return will be greater than the IRR.