homework questions

| June 1, 2016

Question
The net present value (NPV), profitability index (PI), and internal rate of return (IRR) methods
are often employed in project valuation. Identify each of the following statements as true or
false, and explain your answers.
A. The IRR method can tend to understate the relative attractiveness of superior investment
projects when the opportunity cost of cash flows is below the IRR.
B. A PI = 1 describes a project with an NPV = 0.
C. Selection solely according to the NPV criterion will tend to favor larger rather than smaller
investment projects.
D. When NPV = 0, the IRR exceeds the cost of capital.
E. Use of the PI criterion is especially appropriate for larger firms with easy access to capital
markets.

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