CFA® Level 1: CFA® Level 1 Exam - Answering Important Questions

CFA® Level 1 Exam: Correct Statements

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Question

Which of the following statements is correct?

Answers

A. If you are choosing between two projects which have the same cost, and if their NPV profiles cross, then the project with the higher IRR probably has more of its cash flows coming in the later years.

B. The NPV and IRR methods both assume that cash flows are reinvested at the cost of capital. However, the MIRR method assumes reinvestment at the MIRR itself.

C. There can never be a conflict between NPV and IRR decisions if the decision is related to a normal, independent project, i.e., NPV will never indicate acceptance if IRR indicates rejection.

D. A change in the cost of capital would normally change both a project's NPV and its IRR.

E. To find the MIRR, we first compound CFs at the regular IRR to find the TV, and then we discount the TV at the cost of capital to find the PV.

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Explanations

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A. B. C. D. E.

To see this, sketch out a NPV profile for a normal, independent project, which means that only one NPV profile will appear on the graph. If WACC < IRR, then IRR says accept. But in that case, NPV > 0, so NPV will also say accept.

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