Question

You have finally been asked to interview for your dream job. The interviewer wants to test your finance knowledge and tells you just one piece of information about a project being analyzed by H. Cochran, Inc. This one piece of information is that the internal rate of return is calculated to be exactly 15 per cent.

The interviewer then wants you to determine what is the net present value for this project based on the choices below:

A) negative at a discount rate of 10%.
B) positive at a discount rate of 20%.
C) negative at a discount rate of 20%.
D) positive at a discount rate of 15%.
E) Not enough information is provided to answer.

Answer 1

The Correct answer for the given condition is "C"

Step-by-step explanation:

Internal rate of return is the rate at which the NPV (Net Present Value) either Positive or Negative the capital of the project will be Zero all the cash flows. Therefore, the net present Value is Zero at the interest rate of IRR equal to 15 percent.

If the value of IRR is above the given interest rate, Net Present value will be negative

And

If the value of IRR is below the given interest rate, Net Present value will be positive

Answer 2

C) negative at a discount rate of 20%.

Step-by-step explanation:

IRR is the interest rate at which the present value of the project or investment becomes zero. The discount rate above this rate will result the negative NPV and Below this rate will result the positive NPV.

10% is lower than the IRR of 15%, so the NPV should be positive.

20% is higher than the IRR of 15%, so the NPV should be negative.

15% is equal to the IRR of 15%, so the NPV should be zero.