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CFA CFA I Exam
CFA Level I Chartered Financial Analyst (Page 3 )

Updated On: 26-Jan-2026
Page 3 of 793
PDF with 3960 Questions

In order for the NPV and MIRR methods to consistently produce similar rankings, the projects being examined must possess which of the following characteristics? Choose the best answer.

  1. Projects must be independent and equal in size
  2. Projects must equal in scale and be mutually exclusive
  3. Projects must be profitable and have normal cash flows
  4. Projects must equal in scale and have the same life
  5. Projects must equal in scale and have identical cash flows
  6. Projects must have equal lifespans and normal cash flows

Answer(s): D

Explanation:

When examining mutually-exclusive projects with normal cash flows, the MIRR and NPV methods will ALWAYS produce similar results as long as the projects being examined are equal in size and have the same life.



Which of the following projects would likely produce multiple Internal Rates of Return? Assume a 14% discount rate.
Project A
Initial investment outlay: ($500,000)
t1: $900,000
t2: ($100,000)
t3: ($100,000)
t4: ($10,000)
Project B
Initial investment outlay: ($500,000)
t1: $0.00
t2: $650,000
Project C
Initial investment outlay: ($50,000)
t1: $0.00
t2: $0.00
t3: $65,000
t4: $0.00
t5: $0.00
t6: $65,000
Project D
Initial investment outlay: ($1,000,000)
t1: $675,000
t2: $675,000
t3: ($1,500)
t4: $1,500
Project E
Initial investment outlay: ($1,000,000)
t1: $0.00
t2: $0.00
t3: $0.00
t4: $0.00
t5: $2,000,000

  1. Project A, D, and E
  2. Project A and D
  3. Project C
  4. All of these projects will likely result in multiple Internal Rates of Return.
  5. Project B
  6. Project A

Answer(s): B

Explanation:

First of all, the cost of capital is irrelevant in Internal Rate of Return calculations. What is being examined in this example is the determination of "normal" versus "non-normal" projects. Non-normal projects are classified as projects that possess non-normal cash flows. In evaluating projects with "non-normal cash flows" the Internal Rate of Return method will often produce multiple IRRs which leads to an incorrect accept/reject decision. Non- normal cash flows are defined as cash flows in which the sign changes more than once. Projects A and D involve cash outflows superimposed within their cash inflows, resulting in a sign change from positive to negative and negative to positive. In examining projects such as this, it is advisable to use either the NPV or MIRR methods, which are not subject to the problem of multiple IRRs. From observation alone, we can determine that project A and D are non-normal projects, and are thus likely to result in multiple IRR calculations. While project B, C and E have periods of zero cash flows, each only has one change of sign in the overall cash flow process, and therefore all three projects should be characterized as "normal" for purposes of examination. While the cost of capital has been provided, it is not necessary for the determination of the correct answer in this case. What you should look for are projects with non-normal cash flows, and this should not involve any computational analysis. Besides, the cost of capital is not incorporated into the Internal Rate of Return calculation, rather, it is a component of the NPV and MIRR computational methods.



Cochran Corporation has a weighted average cost of capital of 11 percent for projects of average risk. Projects of below-average risk have a cost of capital of 9 percent, while projects of above-average risk have a cost of capital equal to 13 percent. Projects A and B are mutually exclusive, whereas all other projects are independent. None of the projects will be repeated. The following table summarizes the cash flows, internal rate of return (IRR), and risk of each of the projects.
Year (t)Project A Project B Project C Project D Project E
O-200,000-100,000-100,000-100,000-100,000
166,00030,00030,00030,00040,000
266,00030,00030,00030,00025,000
366,00040,00030,00040,00030,000
466,00040,00040,00050,00035,000
IRR12.1114.03810.84816.63611.630
ProjectBelowBelowAverageAboveAbove
RiskAverageAverageAverageAverage
Which projects will the firm select for investment?

  1. Projects: A, D
  2. Projects: B, C, D, and E
  3. Projects: B, D
  4. Projects: B, C, and D
  5. Projects: A, B, and D

Answer(s): A

Explanation:

Look at the NPV, IRR, and hurdle rate for each project:
ProjectABCDE
Hurdle9.00%9.00%11.00%13.00%13.00%
NPV$13,822$11,998
IRR12.11%14.04%10.85%16.64%11.63% Projects A and B are mutually exclusive, so we pick project A because it has the largest NPV. Projects C, D, and E are independent so we pick the ones whose IRR exceeds the cost of capital, in this case, just D. Therefore, the projects undertaken are A and D.



Ace Consulting, a corporate finance consulting firm, is examining the operating performance of Microscam Incorporated. In their analysis, Ace Consulting has identified the following information:
Year 1 interest paid $28,000
Year 2 interest paid $35,000
Year 1 sales $1,675,000
Year 2 sales $1,895,000
Year 1 EBIT $750,000
Year 2 EBIT $987,500
Cost of debt 7.70%
Given this information, what is the Degree of Operating Leverage for this firm during the time period in question?

  1. 1.531
  2. 2.431
  3. The Degree of Operating Leverage cannot be calculated due to the fact that an appropriate discount rate has not been provided.
  4. 2.412
  5. 2.618
  6. 0.415

Answer(s): D

Explanation:

To calculate the degree of operating leverage, use the following equation: {% change in EBIT/% change in sales}. In this example, neither the percentage change in sales, neither the percentage change in EBIT are provided, and must be calculated manually. To calculate the percentage change in sales, use the following equation: {[sales in year 2 - sales in year 1]/sales in year 1}. Incorporating the given information into this calculation yields a % change in sales of 13.13%. To calculate the percentage change in EBIT, use the same equation as follows: {[EBIT in year 2 - EBIT in year 1]/EBIT in year 1}. Incorporating the given information into this calculation yields a percentage change in the EBIT of 31.67%. Finally, to calculate the Degree of Operating Leverage, divide the percentage change in EBIT by the percentage change in sales, which derives a DOL of 2.412. The "interest paid" information is irrelevant in the calculation of the DOL, rather is incorporated into a determination of the Degree of Financial Leverage. This information has been provided to trick you.
Additionally, the Degree of Operating Leverage can be calculated regardless of whether an appropriate discount rate has been provided or not.



If the expected return on the market portfolio increases, the price of a firm's share ______, all else equal.

  1. can be all of these answers.
  2. is not affected
  3. decreases
  4. increases

Answer(s): C

Explanation:

In the usual notation, Po = D1/(k-g). Therefore, if the expected return on the stock, k, increases and all else remains constant, the price will fall. The expected return on the stock, k, increases if the market's expected rate of return increases.



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