- 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
A project has an initial investment of $40,000 and cash inflows of $11,000 a year for 5 years given a required return of 11.649%. Compute the NPV for this project.
A. $1,218
B. -$1,205
C. $0
User Contributed Comments 11
| User | Comment |
|---|---|
| Gina | when i do this with the calculater i get -0.23?? |
| Melle | I get -0.23 too, must be the right answer then....rounded |
| leachim | By definition, NPV=0 with the IRR used as discount rate, so you do not need to do calculations |
| Will1868 | I also get -.230 so they must have rounded to zero |
| janecb1 | I thought of it this way, since the answer is a negative NPV, it really does not matter what is the absolute value. Since the decision rule is reject the project with NPV w. less than or equal to zero, the best answer of the four choices is the upper bound of that decision rule. |
| chamad | -0.23 is like zero dollar |
| Criticull | yeah, i got -0.23 and thought i was using the calc wrong. Thanks for reassuring me... |
| kellyyang | This question does not make sense for me. you can still have negative NPV, but just reject it. how should we round up zero. |
| Profache | Instead of calculating the NPV, you may calculate the IRR. In this case the IRR is 11.649%, same as the discount rate of the project, therefore the NPV is zero |
| JeremyMartin | Is required rate of return similar to IRR? The term IRR is not explicitly stated in the question? When should we assume the required rate of return is equal to the IRR? |
| ksnider | gosh. tricky question. throws you off because it asks one thing. but really wants you to check another... |