Practice Question
Match the following statements to true or false:
A) The discounted payback period is longer than the simple payback period because the future cash flows are worth less.
B) The discounted payback period is longer than the simple payback period because the PV of cash inflows are worth more.
C) IRR decisions rule can be reliably used to choose between mutually exclusive projects.
D) If a project has a discounted payback period within the acceptable time, and it has conventional cash flows, it cannot have a negative IRR.
E) Assuming a cash outflow in year 0 followed by cash inflows in all following years: if the NPV of project is zero, then the IRR of the project will be equal to the discount rate for the project.
F) The NPV and IRR methods will always result in the same accept and reject decisions when the cost of capital is less than IRR for two independent projects.
G) Assuming a cash outflow in year 0 followed by cash inflows in all following years: as the discount rate is increased the IRR decreases while the NPV decreases.
A. TRUE B. FALSE C. FALSE D. FALSE E. TRUE F. TRUE G. FALSE
- A) True. Discounting reduces the value of future cash flows, so the discounted payback period is typically longer.
- B) False. The present value of future cash inflows is less, not more—hence the longer discounted payback period.
- C) False. IRR can be misleading with mutually exclusive projects due to timing or scale differences.
- D) False. Even if the discounted payback is acceptable, the IRR could still be negative based on cash flow structure.
- E) True. By definition, when NPV = 0, IRR equals the discount rate.
- F) True. When projects are independent and IRR > cost of capital, both methods agree on accept/reject decisions.
- G) False. IRR is constant for a given set of cash flows. Only NPV changes as the discount rate changes.