Question

You invest in a certain project with an initial investment that requires you to invest today amount of Baht 200,000. The investment project yields Baht 30,000 to you every year for next 8 years. With these cash flows information, you calculate a Net Present Value (NPV) of the project using 7% discount rate. As a result, the NPV of the project turned negative (NPV is less than zero). Do you think the project’s Internal Rate of Return (IRR) would be

Answer 1

If the NPV of a project is negative at a 7% discount rate, the IRR, which is the breakeven discount rate for NPV to be zero, would be less than 7%, indicating a nonviable project at this discount rate.

Step-by-step explanation:

When you invest in a certain project with an initial investment of Baht 200,000 and the project yields Baht 30,000 every year for the next 8 years, the Net Present Value (NPV) is calculated using a discount rate to determine the current value of those future cash flows. If the NPV is negative using a 7% discount rate, it implies that the project's cash flows are not sufficient to recover the initial investment and provide the minimum acceptable return at that rate. Therefore, the project's Internal Rate of Return (IRR), which is the discount rate that makes the NPV equal to zero, would be less than 7%. IRR is the breakeven rate of return for the project; a lower IRR compared to the discount rate used indicates a project that's not financially viable.