Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

7. Receivables and Investments

Introduction to Investments in Securities

Financial Accounting

7. Receivables and Investments

Introduction to Investments in Securities

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Multiple Choice

If a firm evaluates all of its projects by applying the Internal Rate of Return (IRR) rule, which of the following statements is most accurate?

The IRR rule cannot be used when cash flows change sign more than once.

The IRR rule always leads to the same decision as the NPV rule for mutually exclusive projects.

The firm may accept projects with a positive IRR even if they have a negative Net Present Value (NPV).

The IRR rule is preferred over the NPV rule because it does not require estimating the cost of capital.

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Verified step by step guidance

Understand the concept of Internal Rate of Return (IRR): IRR is the discount rate that makes the Net Present Value (NPV) of all cash flows from a project equal to zero. It is used to evaluate the profitability of potential investments.

Recognize the limitations of the IRR rule: The IRR rule can be problematic when cash flows change sign more than once, leading to multiple IRRs. This occurs in projects with unconventional cash flows, such as alternating inflows and outflows.

Compare IRR and NPV for mutually exclusive projects: The IRR rule does not always lead to the same decision as the NPV rule for mutually exclusive projects. NPV considers the scale of the project and provides a more reliable decision when comparing projects.

Evaluate the relationship between IRR and NPV: A project with a positive IRR may still have a negative NPV if the cost of capital is higher than the IRR. This highlights the importance of considering the cost of capital in decision-making.

Understand why NPV is preferred over IRR: The NPV rule requires estimating the cost of capital, which is a critical factor in determining the value of a project. IRR does not account for this, making NPV a more robust method for evaluating projects.