CFA® Level 1: CFA® Level 1

Which of the following is most correct?

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A. Conflicts between NPV and IRR rules arise in choosing between two mutually exclusive projects (that each have normal cash flows) when the cost of capital exceeds the crossover point (that is, the point at which the NPV profiles cross).

B. None of the statements are correct.

C. The discounted payback method overcomes the problems that the payback method has with cash flows occurring after the payback period.

D. The NPV and IRR rules will always lead to the same decision in choosing between mutually exclusive projects, unless one or both of the projects are "non- normal" in the sense of having only one change of sign in the cash flow stream.

E. The Modified Internal Rate of Return (MIRR) compounds cash outflows at the cost of capital.

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A. B. C. D. E.

IRR can lead to conflicting decisions with NPV even with normal cash flows if the projects are mutually exclusive. Cash outflows are discounted at the cost of capital with the MIRR method, while cash inflows are compounded at the cost of capital. Conflicts between NPV and IRR arise when the cost of capital is below the crossover point. The discounted payback method does correct the problem of ignoring the time value of money, but it still does not account for cash flows beyond the payback period.

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