Which of the Following Statements Is CORRECT? Assume That All

question 97

Multiple Choice

Which of the following statements is CORRECT? Assume that all projects being considered have normal cash flows and are equally risky.

• A) If a project's IRR is equal to its cost of capital, then under all reasonable conditions, the project's IRR must be negative.
• B) If a project's IRR is equal to its cost of capital, then under all reasonable conditions the project's NPV must be zero.
• C) There is no necessary relationship between a project's IRR, its cost of capital, and its NPV.
• D) When evaluating mutually exclusive projects, those projects with relatively long lives will tend to have relatively high NPVs when the cost of capital is relatively high.
• E) If a project's IRR is equal to its cost of capital, then, under all reasonable conditions, the project's NPV must be negative.

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Definitions:

Strip Bond

A type of bond where the coupon payments have been separated from the principal, allowing them to be sold independently as zero-coupon bonds.

Discount Rate

The interest rate charged by central banks for loans to commercial banks or the rate used in discounted cash flow analysis to determine present value.

Issue Price

The price at which a new issue of securities (like stocks or bonds) is offered to the public by an issuer.

Decrease Rate

The rate at which a quantity is reduced over a specific period of time.