Statement – I : In general, the NPV and IRR methods lead to the same acceptance or rejection decision when a single project is involved. Statement – II : The inconsistency in ranking of competing projects as per the NPV and IRR methods lies in the implicit assumptions with regard to different rates of returns on re-investment of intermediate cash flows. Code :
Both the statements are correct
Both statements compare the net present value (NPV) and internal rate of return (IRR) techniques of capital budgeting, and each must be judged separately for truth.
Statement I says that for a single project the two methods lead to the same accept or reject decision. This is true. For one conventional, independent project (an outflow followed by inflows), a positive NPV always corresponds to an IRR greater than the cost of capital, and a negative NPV to an IRR below it. So both signals agree; conflicts between NPV and IRR arise only when ranking two or more mutually exclusive projects, not in a lone accept/reject test.
Statement II says the main difference between the two methods lies in their implicit reinvestment assumption for intermediate cash flows. This is also true and is the deeper theoretical point. NPV implicitly assumes that interim cash inflows are reinvested at the firm's cost of capital, whereas IRR implicitly assumes they are reinvested at the project's own internal rate of return. This difference is what can make the two methods rank competing projects differently.
Since both statements are individually correct, the first code applies.
Hence both statements are correct.
Similar Questions
A public works project is proposed that has total present-worth benefits of ₹ 75 million and total present-worth cost of ₹ 55 million. In deliberating this proposal, some members of the Municipal Board have suggested that the project has a total present-worth disbenefits of ₹ 15 million; other members feel that ₹ 15 million should be treated as a cost. What will be the benefit cost ratio and net benefits value while considering the disbenefits as a cost?
Select the correct statement/s from the following :
Statement I : The slope of the NPV profile reflects how sensitive the project is to discount rate changes.
Statement II : To find total NPV of more than one projects, their NPV cannot be added.
Statement III : The certainty equivalent coefficient applies adjustments to both, the cash flows (in the numerator) and the discount factor (in the denominator).
Statement IV : The risk - adjusted discount factor applies adjustment for risk only to the discount factor (denominator).
Codes :
Indicate the correct code for the combination from the following regarding the superiority of the wealth maximisation over the profit maximisation objective of the financial management :
(a) It takes into account long term stability and survival of the firm.
(b) It takes care of all other objectives of the firm like exploring and expanding markets, etc.
(c) It is based on the assumption of perfect competition in the market.
(d) It considers risk alongwith returns.
Code :
Capital budgeting is concerned with :
Which combination of the following statements about the net present value method of the investment project appraisal is correct ?
(a) It considers all the cash flows from the project
(b) It gives more weightage to distant flows than near-term flows
(c) It considers the time value of money
Code :
In which of the following appraisal criteria of capital budgeting, the use of varying opportunity cost of capital as a discount factor is possible ?
(a) NPV
(b) IRR
(c) Pay-back Period
(d) ARR
Select the correct statement/s from the following:
Statement I: The slope of the NPV profile reflects how sensitive the project is to discount rate changes.
Statement II: To find total NPV of more than one projects, their NPV cannot be added.
Statement III: The certainty equivalent coefficient applies adjustments to both, the cash flows (in the numerator) and the discount factor (in the denominator).
Statement IV: The risk-adjusted discount factor applies adjustment for risk only to the discount factor (denominator).
Codes:
Under the Modified Accelerated Cost Recovery System (MACRS) an asset in the “5 year property class” would typically be depreciated over how many years ?
In case the firm makes varying investments on the different investment projects, the appropriate project evaluation technique would be, which one of the following?
A company issues 11% debentures of ₹ 100 each for an amount aggregating ₹ 2,00,000 at 10% premium, redeemable at par after 5 years. The company tax rate is 40%. The cost of debt is:
Important Questions from Capital Budgeting
A firm is currently earning Rs. 50,000 and its one share has a present market value of Rs. 175. It has 5,000 shares outstanding. The earnings of the firm is expected to remain stable and it has a payout ratio of 100%. The cost of equity is:
With project cost of ₹300 lacs, profits after depreciation (straight line method) and tax for its lifetime of 5 years are estimated at ₹10 lacs, ₹10 lacs, ₹30 lacs, ₹40 lacs and ₹50 lacs respectively. The cost of capital is 12% and discount factors @ 12%, for the first five years are 0.89, 0.80, 0.71, 0.64 and 0.57 respectively. The Net present value of project is :
Match List I with List II
LIST I
(Investment Decision rule)
LIST II
(Feature)
A. NPV I. Insufficiently consistent B. Payback II. Highly Inflexible C. Cash Returns III. Balance between flexibility and consistency D. Accounting Returns IV. Relatively consistent Choose the correct answer from the options given below:
Which of the following are assumption of Net Operating Income Approach of Capital Structure?
(A) There is no Corporate Tax
(B) Cost of debt remain constant at all level
(C) The Business risk remain constant every level of debt and equity mix
(D) The cost of Debt is less than cost of equity
(E) Overall cost of Capital remain constant
Choose the correct answer from the options given below:
Fixing the zero date is important step in establishing a project-
