When the cash flows start negative and change sign more than once, multiple valu

Question

When the cash flows start negative and change sign more than once, multiple values of IRR will certainly be obtained.

Answer True (T) or False (F) under T/F 1 A combined Real Option (RO) and Decision Tree (DT) analysis accounts for both market and technical risk. 2 A project with a negative NPW will always have a negative Benefit/Cost Ratio (BCR). 3 A risk-adjusted hurdle rate should not be used as a discount rate to select worthy R&D projects based on their NPW. 4 A series of non-uniform cash flows can be shown to be economically equivalent to another series of uniform cash flows. 5 Amount of money spent in the past should not be taken into account when deciding on whether to undertake a future investment. 6 An “Option” implies an obligation to invest in a project. 7 Balancing the R&D pipeline means that we should have as few as possible of the risky early-stage project, and more of the later-stage sure-winner projects. 8 Beta () equals the covariance of a company’s returns and SP500 returns, divided by the variance of SP500 returns. 9 Book value is an accurate measure of the real worth of an enterprise. 10 Decision Tree Analysis (DTA) accounts for management flexibility and market volatility in the computation of the Expected Value of NPW. 11 Depreciation has no effect on free cash flow if the tax rate is zero. 12 EBIT stands for Earnings before inflation and tax. 13 For a volatility, = 0.20, and a risk-free rate ro = 0.05, the risk-neutral probability q = 0.567. 14 For continuous compounding, the monthly discount rate is equal to the annual simple discount rate divided by 12. 15 Horizon value of a perpetual uniform free cash flows (FCF) is infinite. 16 If money can be invested at a 10% nominal annual interest rate, it is better to receive $100,000 now than $15,000 at the end of each year for 10 years. 17 In capital budgeting, we should always select the projects that provide the highest “bang for the buck”, i.e., the highest BCR. 18 In the CAPM, a higher implies lower sensitivity to systematic risk. 19 Incremental Benefit/Cost Ratio (BCR) is the difference between the BCRs of two mutually-exclusive alternatives. 20 MARR should be at least equal to the WACC. 21 Monte-Carlo simulations are employed to determine the standard deviation of a project’s IRR when several project parameters are described by probability distributions. 22 Option value is higher when volatility is low. 23 The annual compound interest rate corresponding to a credit card simple annual interest rate of 18%, continuously-compounded is more than 20%. 24 The expected value of a set of possible outcomes is the sum of the products of the values of these outcomes times their probabilities of occurrence. 25 The expected value of the NPW of a project with a 60% probability of success, and for which the PV of the costs is $500K and the PV of the benefits is $1.0M is $100K. 26 To account for the time value of money, we must multiply a future cash flow in year n by the factor [n(1 + r)], where r is the interest rate. 27 To compute the MIRR all we need are the cash flows and a discount rate. 28 To reduce market risk in portfolio optimization, we should avoid anti-correlated projects because they cancel one another. 29 When comparing two mutually-exclusive projects we should always select the project with the higher IRR. 30

When the cash flows start negative and change sign more than once, multiple values of IRR will certainly be obtained.

Explanation / Answer

1. Incomplete question

2. False (the B/C ratio will be lower than 1)

3. False

4. True

5. True

6. True

7. False

8. True

9. True

10. True

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