Final answer:
The internal rate of return (IRR) is negative if the NPV is negative. A project's level of risk does not directly influence the IRR; it affects the discount rate required by investors. Comparing projects solely on IRR can be misleading without considering other factors such as investment scale and timing of cash flows.
Step-by-step explanation:
The correct statement about the internal rate of return (IRR) is: 'A project's IRR is negative if the NPV of the project is negative.' The IRR is a financial metric used to assess the profitability of investments and is calculated as the discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero.
It is important to note that a project's IRR does not directly depend on the project's level of risk. The risk of a project affects the discount rate that investors require, which is analyzed separately from the IRR. Therefore, a more risky project will not automatically correspond to a higher or lower IRR but may lead to a higher discount rate or expected rate of return required by investors.
Regarding the comparison of projects, the statement that the project with the higher IRR is always the better project is incorrect. While IRR is an important measure, it must be considered in conjunction with other factors such as the scale of the investment, the timing of cash flows, and project risk. A project's IRR does not capture the magnitude of its potential benefits; a smaller project might have a higher IRR but contribute less overall value than a larger project with a lower IRR.