CFA® Level 1 Exam - Most Correct Statement

Most Correct Statement

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Question

Which of the following statements is most correct?

Answers

A. None of the statements are correct.

B. When choosing between mutually exclusive projects, managers should accept all projects with IRRs greater than the weighted average cost of capital.

C. Multiple IRRs can occur in cases when project cash flows are normal, but they are more common in cases where project cash flows are nonnormal.

D. All of the statements are correct.

E. One of the disadvantages of choosing between mutually exclusive projects on the basis of the discounted payback method is that you might choose the project with the faster payback period but with the lower total return.

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Explanations

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A. B. C. D. E.

The payback and discounted payback methods both ignore cash flows that are paid or received after the payback period. Concerning the other statements:

Multiple IRRs can occur only for projects with nonnormal cash flows. Mutually exclusive projects implies that only one project should be chosen. The project with the highest NPV should be chosen.

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