Two Fellow Financial Analysts Are Evaluating a Project with the Following

question 78

Multiple Choice

Two fellow financial analysts are evaluating a project with the following net cash flows: One analyst says that the project has an IRR of between 12 and 13%.The other analyst calculates an IRR of just under 800%,but fears his calculator's battery is low and may have caused an error.You agree to settle the dispute by analyzing the project cash flows.Which statement best describes the IRR for this project?

• A) There is a single IRR of approximately 12.7 percent.
• B) This project has no IRR, because the NPV profile does not cross the X axis.
• C) There are multiple IRRs of approximately 12.7 percent and 787 percent.
• D) This project has two imaginary IRRs.
• E) There are an infinite number of IRRs between 12.5 percent and 790 percent that can define the IRR for this project.

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Definitions:

Joint Costs

The costs incurred in the process of producing two or more joint products before the point at which the products become separately identifiable.

Split-Off Point

In a production process, the stage at which jointly processed products become individually identifiable and able to be separated into distinct products.

Weighted Average Method

This inventory costing method calculates the cost of goods sold and ending inventory balance using the average cost of all similar items in inventory, weighted by the number of units.

Physical Units Method

An inventory costing method that allocates expenses based on the physical units produced or available, commonly used for homogeneous products.