Question

A company has a project with an estimated net present value (NPV) of −$500,000. Suppose that the project has a unique internal rate of return (IRR) and an opportunity cost of capital of 15%. Determine whether the IRR of the project will be greater than, equal to, or less than 15%. You should explain the logic behind your answer. (Hint: you can elaborate this using a graph.)

Answer 1

The internal rate of return (IRR) of the project will be less than 15%.

Step-by-step explanation:

The internal rate of return (IRR) of a project represents the discount rate at which the project's net present value (NPV) is equal to zero. In this case, the estimated NPV of the project is -$500,000. Since the project has a unique IRR and an opportunity cost of capital of 15%, we can determine whether the IRR will be greater than, equal to, or less than 15% by comparing it to the opportunity cost of capital.

If the IRR is greater than 15%, it means that the project's rate of return is higher than the opportunity cost of capital, making it an attractive investment. If the IRR is equal to 15%, the project's rate of return is exactly equal to the opportunity cost of capital. Lastly, if the IRR is less than 15%, it means that the project's rate of return is lower than the opportunity cost of capital, making it less favorable.

By analyzing the NPV of -$500,000 and the opportunity cost of capital of 15%, we can infer that the IRR of the project will be less than 15%.