Certified Management Accountant Investment Decisions 2

Question 1

A project has an IRR of 15% and the company's cost of capital is 12%. The project should be:

Accepted Answer

Accepted because IRR exceeds cost of capital

Answer

When IRR exceeds the cost of capital, the project generates returns above the minimum required rate and should be accepted.

Question 2

Which statement about NPV and IRR is correct when evaluating independent projects?

Accepted Answer

They give the same accept/reject decision

Answer

For independent projects, NPV and IRR give consistent decisions: if IRR exceeds the cost of capital, NPV is positive, and both methods recommend acceptance.

Question 3

The discount rate that makes a project's NPV equal to zero is the:

Accepted Answer

Internal rate of return

Answer

The IRR is defined as the specific discount rate at which the project's NPV equals exactly zero.

Question 4

When two mutually exclusive projects have conflicting NPV and IRR rankings, which method should be preferred?

Accepted Answer

NPV, because it measures absolute value added to the firm

Answer

NPV is preferred for mutually exclusive projects because it directly measures the absolute increase in firm value, aligning with the wealth-maximization objective.

Question 5

To calculate a project's NPV, cash flows are:

Accepted Answer

Discounted to present value, summed, and then reduced by the initial investment

Answer

NPV requires discounting each future cash flow to present value, summing those present values, and subtracting the initial investment.

Certified Management Accountant Practice Test

Certified Management Accountant Practice Test

Certified Management Accountant Investment Decisions 2