Topic 3 Flashcards
The internal rate of return of a project (IRR) is
The discount rate that makes the NPV equals to 0.
Assume an investment with an initial investment at time t=0, and positive cash flows from t=1 until maturity.
We have to invest in the project if its NPV is bigger than 0.
TRUE
Assume an investment with an initial investment at time t=0, and positive cash flows from t=1 until maturity.
We have to invest in the project if its cost of capital is lower than IRR.
TRUE
Assume an investment with an initial investment at time t=0, and positive cash flows from t=1 until maturity.
If two firms develop this project, the firm whose cost of capital is lower will obtain a higher NPV.
TRUE
Assume an investment with an initial investment at time t=0, and positive cash flows from t=1 until maturity.
If the NPV of this project is 0, then its return is 0.
FALSE; NPV=0 -> RETURN=i
In the real asset markets…
There are many barriers to entry, and potentially, many investments with positive NPV.
The payback is expressed in monetary terms (e.g. $)
FALSE in time
The payback is the number of years needed to recover the initial investment
TRUE
The payback rule is attractive to managers that are assessed based on short term results.
TRUE
The discounted payback considers the time value of money
TRUE
NPV’s rule established that we have to reject those projects with negative NPV
TRUE
There are a to barriers to entry in the market for real assets
TRUE
Capital rationing has to be applied when there is a limited availability of cash/credit for facing the initial negative cash flows of a project.
TRUE
Potentially, there are a lot of investments with positive NPV in financial markets, because barriers to entry are very low.
FALSE
