Which of the following statement is incorrect? O a. Payback period is defined as the number of years it takes for the cash flows from a project to recover the project's initialinvestment. O b.NPV method is better than payback period method in the way that NPV method accounts for the time value of moneywhereas payback period method does not. O c. In general, there can be as many lRRs as the number of times the project's cash flows change sign over time. O d. An internal rate of return (IRR) will always exist for an investment opportunity.
Question
Which of the following statement is incorrect?
O a. Payback period is defined as the number of years it takes for the cash flows from a project to recover the project's initialinvestment. O b.NPV method is better than payback period method in the way that NPV method accounts for the time value of moneywhereas payback period method does not. O c. In general, there can be as many lRRs as the number of times the project's cash flows change sign over time. O d. An internal rate of return (IRR) will always exist for an investment opportunity.
Solution
The incorrect statement is:
O d. An internal rate of return (IRR) will always exist for an investment opportunity.
Explanation:
The internal rate of return (IRR) is the discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. However, it's not always the case that an IRR will exist for every investment opportunity.
For instance, if the cash flows from a project never cross the horizontal axis when plotted on a graph (i.e., they are all positive or all negative), then the project does not have a real IRR. This is because there is no discount rate that will make the NPV of the cash flows equal to zero.
The other statements are correct:
a. The payback period is indeed defined as the number of years it takes for the cash flows from a project to recover the project's initial investment.
b. The NPV method is indeed better than the payback period method in that the NPV method accounts for the time value of money, whereas the payback period method does not.
c. In general, there can indeed be as many IRRs as the number of times the project's cash flows change sign over time. This is known as the problem of multiple IRRs.
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