Question

When a potential investment has a negative net present value, A : the project is likely to be accepted since the cash flows occur just after the initial investment. B : it is not possible to use the internal rate of return method. C : its internal rate of return is less than the required rate of return. D : the internal rate of return calculation will yield a negative internal rate of return factor.

Answer 1

C : its internal rate of return is less than the required rate of return.

Step-by-step explanation:

When the net present value(NPV) of the project is negative, it means that the present value of the expected future cashflows is less than the initial amount invested in the project. Based on the NPV rule, you accept the project whose net present value is greater than 0 and reject if NPV is less than 0. This potential project will be rejected as its NPV is negative.

Net Present Value and Internal Rate of Return always agree on a project decision as long as the cashflows have the same pattern. The IRR rule agrees on the term that the IRR should be greater than the required rate of return for a project to be accepted and rejected if otherwise. Therefore, if NPV is negative, the IRR will be less than the required rate of return.