Which of the following statements is (are) true?
(I) If an investment project has an internal rate of return (IRR) equal to the cost of capital,the net present value (NPV) for that project must be positive.
(II) If the cumulative cash flows,∑ F_t,change signs more than once during the term of an investment,there may be more than one IRR.

Question

Quizplus · Accepted Answer

Statement (I) is not always true. It is possible that an investment project has an IRR equal to the cost of capital, but the NPV may still be negative. This can happen when the initial outlay for the project is very high and the cash flows generated by the project are not sufficient to cover the cost of capital and the initial outlay.

Statement (II) is true. If the cumulative cash flows change signs more than once during the life of the project, there may be multiple IRRs. This happens because the IRR is the discount rate that makes the NPV of the project equal to zero, and if there are more than one sign change, there may be more than one discount rate that satisfies this condition.

Which of the Following Statements Is (Are)true