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Question of the Week - IRR and NPV
Which of the following statements regarding Internal Rate of Return (IRR) and Net Present Value (NPV) is/are most likely correct?
1: If the NPV and IRR methods give conflicting decisions for mutually exclusive projects, the IRR method should be used to select the project.
2: A project may have positive NPV even if its IRR is less than the cost of capital
3: IRR is the discount rate at which the NPV of the project is zero.
4: A project’s IRR can be positive even if the NPV is negative.
Question of the Week - IRR and NPV 48 votes
Both statements 1 and 2 are correct
Both statements 3 and 4 are correct
Statements 2, 3 and 4 are correct
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Comments
Wish I could change that answer...
I will let you change it in my book!
Correct Answer: B
IRR is the discount rate at which the NPV of the project is zero. If the IRR is less than the cost of capital, the project’s NPV will be negative, even though IRR is positive. Thus, both statements 3 and 4 are correct.
If the NPV and IRR methods give conflicting decisions for mutually exclusive projects, the project with greatest positive NPV should be selected. A project cannot have positive NPV if its IRR is less than the cost of capital. Thus, statements 1 and 2 are incorrect.