Determine whether the following statements are true or false: -The internal rate

Question

Determine whether the following statements are true or false:

-The internal rate of return will equal the discount rate when the net present value equals zero.

-The main disadvantage of the NPV method is the need for detailed, long-term forecasts of free cash flows generated by prospective projects.

-The modified internal rate of return represents the project's internal rate of return assuming that intermediate cash flows from the project can be reinvested at the project's required return.

-Using the weighted cost of capital as a cutoff rate assumes that the riskiness of the project being evaluated is similar to the riskiness of the company's existing assets.

-When several sign reversals in the cash flow stream occur, a project can have more than one IRR.

Explanation / Answer

1.True.The internal rate of return will equal the discount rate when the net present value equals zero.

2.True.The main disadvantage of the NPV method is the need for detailed, long-term forecasts of free cash flows generated by prospective projects.

3.True.The modified internal rate of return represents the project's internal rate of return assuming that intermediate cash flows from the project can be reinvested at the project's required return.

4.True: Using the weighted cost of capital as a cutoff rate assumes that the riskiness of the project being evaluated is similar to the riskiness of the company’s existing assets;

5.True.When several sign reversals in the cash flow stream occur, a project can have more than one IRR

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