Asked by Bulut Yasin on May 09, 2024
Verified
Which statement regarding normal cash flows is correct?
A) If a project has normal cash flows, then its IRR must be positive.
B) If a project has normal cash flows, then its MIRR must be positive.
C) If a project has normal cash flows, then it will have exactly two real IRRs.
D) If a project has normal cash flows, then it can have only one real IRR, whereas a project with non-normal cash flows might have more than one real IRR.
Normal Cash Flows
Regular inflows or outflows of cash associated with operational activities of a business within a specific period.
Modified Internal Rate of Return (MIRR)
A capital budgeting method that adjusts the internal rate of return calculation to better reflect the project's cost of capital and investment returns.
Real Internal Rate of Return
The adjusted rate of return that accounts for inflation, providing a more accurate measure of the actual purchasing power of future cash flows from an investment.
- Understand the scenarios where a project can possess multiple Internal Rates of Return and its consequences for the capital budgeting process.
Verified Answer
SG
Shomi GhoshMay 12, 2024
Final Answer :
D
Explanation :
Normal cash flows involve an initial outlay followed by a series of positive cash inflows, which means the project can have only one real IRR. Non-normal cash flows, which involve sign changes in the cash flow stream more than once, can result in multiple IRRs.
Learning Objectives
- Understand the scenarios where a project can possess multiple Internal Rates of Return and its consequences for the capital budgeting process.