Question

If the net present value of a project that costs $20,000 is $5,000 when the discount rate is 10%, then the: A. project's IRR equals 10%. B. project's rate of return is greater than 10%. C. net present value of the cash inflows is $4,500. D. project's cash inflows total $25,000.

Answer 1

B. project's rate of return is greater than 10%

Step-by-step explanation:

The net present value is the present value of after tax cash flows from an investment minus the amount invested.

The internal rate of return is the discount rate that equates the after tax cash flows from an investment to the amount invested.

If the net present value is less than zero, then the IRR is less than the cost of capital.

If the net present value is greater than zero, then the IRR is greater than the cost of capital.

The NPV is $20,000, therefore, the cost of capital which is 10% is less than the IRR.

I hope my answer helps you.