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CFA CFA I Exam
CFA Level I Chartered Financial Analyst (Page 70 )

Updated On: 26-Jan-2026
Page 70 of 793
PDF with 3960 Questions

Your company is planning to open a new gold mine which will cost $3 million to build, with the expenditure occurring at the end of the year. The mine will bring year-end after-tax cash inflows of $2 million at the end of the two succeeding years, and then it will cost $0.5 million to close down the mine at the end of the third year of operation. What is this project's IRR?

  1. 12.70%
  2. 14.36%
  3. 10.17%
  4. 21.53%
  5. 17.42%

Answer(s): A

Explanation:

Time line:
-3,000,0002,000,0002,000,000-500,000
Financial calculator solution: (In millions)
Inputs: CF(0) = -3; CF(1) = 2; N(j) = 2; CF(2) = -.5.
Output: IRR% = 12.699%.



Under the Residual Dividend Policy, a firm pays out:

  1. none of these answers.
  2. only net earnings left over after financing the current optimal capital budget requirements, consistent with the target capital structure.
  3. all of its earnings left over after taxes and expenses as dividends.
  4. only net earnings from new projects as dividends, using the rest to finance current capital requirements.

Answer(s): B

Explanation:

Under the Residual Dividend Policy, a firm first determines the amount of capital it requires for sufficiently profitable projects. It then uses retained earnings to supply equity capital and raises debt in the proper amount to maintain the target capital structure. If any earnings are left over after this, they are paid out as dividends. If not, the firm will not only not pay any dividends but also issues new equity for financing.



In the calculation of WACC, which of the following should be ignored?

  1. none of these answers.
  2. long-term debt.
  3. current liabilities.
  4. preferred equity.

Answer(s): C

Explanation:

Short-term debt is not a part of the capital structure. The capital budgeting process allocates resources to long- term asset investments and as such is financed by liabilities/capital of similar maturity. Hence, short-term/ current liabilities do not enter into WACC calculations.



Which of the following is/are true about the MACRS?

  1. MACRS does not use economic life of an asset while calculating depreciation.
    II. Under the MACRS system, the depreciation expense is larger in the early years, leading to lower taxes.
    III. Depreciation under MACRS must be calculated using the accelerated depreciation method.
  2. III only
  3. II only
  4. I, II & III
  5. II & III
  6. I only
  7. I & II

Answer(s): F

Explanation:

MACRS classifies assets into several classes based on a pre-determined length of time called the "recovery period." The recovery period, while positively correlated with actual economic life, does not track the economic lives of individual assets precisely. In particular, recovery periods are shorter than actual economic lives, leading to higher depreciation expenses and lower taxes. For long-recovery period classes (>27 years), straight-line depreciation must be used while accelerated methods may be used for shorter life assets.



Which of the following statements is false?

  1. When IRR = k (the cost of capital), NPV = 0.
  2. If the multiple IRR problem does not exist, any independent project acceptable by the NPV method will also be acceptable by the IRR method.
  3. The IRR can be positive even if the NPV is negative.
  4. The NPV will be positive if the IRR is less than the cost of capital.
  5. The NPV method is not affected by the multiple IRR problem.

Answer(s): D

Explanation:

If the IRR is less than the cost of capital, then taking on the project imposes a cost on current stockholders. If the cost of capital is greater than the IRR, the NPV will be negative.



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