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Which two of the following five statements are correct? Select two alternatives: The IRR Investment Rule states to take any investment opportunity where the IRR exceeds the opportunity cost of capital
Which two of the following five statements are correct?
Select two alternatives:
- The IRR Investment Rule states to take any investment opportunity where the IRR exceeds the opportunity cost of capital.
- The IRR is affected by errors in the estimate of your cost of capital.
- The IRR investment rule will identify the correct decision in many, but not all, situations.
- NPV is positive only for discount rates greater than the internal rate of return.
- The payback rule is simple to calculate and favors short-term investments. It will indicate those projects with highest NPV.
Expert Solution
Let's go option by option.
option 1: Yes its correct. IRR should be greater than opportunity cost of capital.
Option 2: IRR is not used to estimate cost of capital. second option is wrong.
Option 3: It is correct. IRR usually gives correct decision. But if ina project there are more than 1 negative cash flow than it can give error.
Option 4: This is wrong. NPV is positive is IRR greater than discount rate.
Option 5: Payback can also provide lowest NPV. In payback we neglect the cash flows after the payback period. Hence option is wrong.
So Option 1 and option 3 are correct here.
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