All of the Following Are True About the NPV and the IRR

question 15

Multiple Choice

All of the following are true about the NPV and the IRR hurdle investment decision rules, except:

• A) If the NPV and the IRR give a different decision recommendation, the IRR is more correct.
• B) In most typical real estate circumstances the IRR hurdle rule will give the same investment recommendation as the NPV rule.
• C) In comparing two mutually exclusive investments of different scale, the IRR rule can be misleading while the NPV rule will lead to a correct wealth-maximizing decision.
• D) The IRR sometimes is indeterminate, whereas a unique NPV can always be calculated.

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Definitions:

Earnings Per Share

A financial metric calculated by dividing the net earnings available to common shareholders by the average outstanding shares.

Closing Price

The final price at which a security is traded on a given trading day, often used for performance assessment.

Default Risk Premium

The additional return that an investor demands for taking on the risk that the borrower may default on the loan.

Liquidity Risk Premium

An additional return that investors require for holding securities with less liquidity, compensating for the risk of not being able to sell quickly at the fair market price.