Question

Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.a. A project's regular IRR is found by compounding the cash inflows at the cost of capital to find the present value (PV), then discounting the TV to find the IRR.b. If a project's IRR is smaller than the cost of capital, then its NPV will be positive.c. A project's IRR is the discount rate that causes the PV of the inflows to equal the project's cost.d. If a project's IRR is positive, then its NPV must also be positive.e. A project's regular IRR is found by compounding the initial cost at the cost of capital to find the terminal value (TV), then discounting the TV at the cost of capital.

Answer 1

c. A project's IRR is the discount rate that causes the PV of the inflows to equal the project's cost.

CORRECT IT MAKES NET PRESENT VALUE ZERO

THerefore, present value of the inflows equal the project initial cash outlay.

Step-by-step explanation:

a. A project's regular IRR is found by compounding the cash inflows at the cost of capital to find the present value (PV), then discounting the TV to find the IRR.

FALSE IRR is the rate at which net present value equals to zero

b. If a project's IRR is smaller than the cost of capital, then its NPV will be positive.

FALSE if the project maximum return (IRR) is lower than cost of capital then, his net present value will be negative.

d. If a project's IRR is positive, then its NPV must also be positive.

FALSE the IRR of project generates his NPV to be zero.

e. A project's regular IRR is found by compounding the initial cost at the cost of capital to find the terminal value (TV), then discounting the TV at the cost of capital.

FALSE the IRR do not use the cost of capital it works with the nominal cash amounts and makes them equal to the cash outlay.