Question

The net present value of a proposed investment is negative. Therefore, the discount rate used must be:

A. greater than the project's internal rate of return.
B. less than the project's internal rate of return.
C. greater than the minimum required rate of return.
D. less than the minimum required rate of return.

Answer 1

A. greater than the project's internal rate of return.

Step-by-step explanation:

Net present value method: In this method, the initial investment is subtracted from the discounted present value cash inflows. If the amount comes in positive than the project is beneficial for the company otherwise not. It shows the inverse relationship between the net present value and the discount rate

The computation of the Net present value is shown below

= Present value of all yearly cash inflows after applying discount factor - initial investment

The discount factor should be computed by

= 1 ÷ (1 + rate) ^ years

Internal rate of return: It is that rate of return in which the net present value is zero. i.e NPV = zero