Question

If the calculated NPV is negative, then which of the following must be true? The discount rate used is:

a) Greater than the IRR
b) Less than the IRR
c) Equal to the IRR
d) Too high"

Answer 1

If the calculated NPV is negative, it means that the present value of the cash flows is less than the initial investment. This indicates that the project is not generating enough returns to cover the cost of capital. Answer is b) Less than the IRR

Step-by-step explanation:

If the calculated NPV is negative, it means that the present value of the cash flows is less than the initial investment. This indicates that the project is not generating enough returns to cover the cost of capital.

In this case, the discount rate used would be greater than the internal rate of return (IRR). The IRR is the discount rate at which the NPV is zero, and it represents the project's expected rate of return.

Therefore, for a negative NPV, the discount rate used would be greater than the IRR.