Question

An independent project has conventional cash flows and a positive net present value. It can be stated with certainty that the project is acceptable according to the capital budgeting technique known as:

A) Payback.
B) Discounted payback.
C) The accounting rate of return.
D) The crossover method.
E) The internal rate of return

Answer 1

The project is acceptable according to the capital budgeting technique known as the internal rate of return (IRR).

Step-by-step explanation:

The project is acceptable according to the capital budgeting technique known as the internal rate of return (IRR).

IRR is the discount rate at which the net present value (NPV) of the project becomes zero. Since the project has a positive NPV, it means that the present value of its future cash flows exceeds the initial investment. Therefore, the IRR, which ensures that the NPV is zero, confirms the project's acceptability.

For example, if the initial investment is $100,000 and the project's cash flows generate a total present value of $120,000, the IRR would be the rate at which the NPV becomes zero, such as 10%. As long as the IRR is greater than the required rate of return or cost of capital, the project is considered acceptable.