- 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
Is it possible that a project has a payback period of one year, a negative NPV, and a positive IRR?
A. Yes
B. No, because a project with a positive IRR has a positive NPV.
C. No, because a project with a negative NPV has a negative payback period.
Explanation: If the cumulative cash in one year equals the outlay and additional cash flows are not very large, this scenario is possible. For example: initial outlay = 100, first year cash flow = 100, and second year cash flow = 5. The required rate of return is 10%. This project would have a payback period of 1 year, an NPV of -4.96, and an IRR of 4.77%.
User Contributed Comments 2
| User | Comment |
|---|---|
| morek | Good explanation. |
| soukhov | note that they use simple PP, not discounted PP |