CFA Practice Question

There are 233 practice questions for this study session.

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
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