Page 354 - F2 - MA Integrated Workbook STUDENT 2018-19

Chapter 14

Test your understanding 7

The NPV of a project has been calculated at two different discount rates:

At 10% the NPV is $13,725

At 15% the NPV is -$40,520

Calculate the IRR

Test your understanding 8

Which of the following statements regarding the IRR are true? Select all that
apply.

A The IRR is the interest rate that equates the present value to expected
future cash flows to the initial cost of the investment outlay.

B If the IRR for a project is greater than the company’s cost of capital, the
project should be accepted.

C With mutually exclusive projects, the project with the lowest internal rate
of return should be selected.

D An advantage of IRR is that it is an absolute measure.

E If all projects with an IRR higher than the company’s cost of capital are
accepted, this should lead to the maximisation of shareholder wealth.

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