CIMA Exam CIMAPRO19-P02-1 Topic 4 Question 92 Discussion

Actual exam question for CIMA's CIMAPRO19-P02-1 exam

Question #: 92
Topic #: 4

You have just assessed an investment proposal, involving an immediate cash outflow followed by a series of cash inflows over the next 7years, by deducing the NPV and the IRR. You have now discovered that you have

underestimated the discount rate.

Correcting the underestimation will have the following effect, relative to your original deductions:

ANPV will reduce, IRR will not change

BNPV and IRR will not change

CNPV will increase, IRR will reduce

DNPV and IRR will both increase

ENot enough information given for an answer

Show Suggested Answer

Suggested Answer: A

by Lorean at Jul 08, 2024, 07:32 AM

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Tamar

5 months ago

Yes, that's true. So, the correct answer is C) NPV will increase, IRR will reduce.

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Stefan

5 months ago

Okay, let's see. If the discount rate is underestimated, that means the company's cost of capital is higher than they thought. That's gotta hurt the NPV, but the IRR? Beats me, I'm just trying to survive this exam!

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Mammie

5 months ago

Hmm, let me think about this. If the discount rate goes up, the NPV has to go down, that's a no-brainer. But the IRR? I'm a bit stumped on that one.

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Annamaria

4 months ago

I agree, but I'm not sure about the IRR.

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Terina

4 months ago

If the discount rate goes up, the NPV has to go down.

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5 months ago

I think correcting the underestimation of the discount rate will increase the NPV.

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