Which of the following statements regarding an internal rate of return analysis is false?

a. All other things being equal, the higher the internal rate of return the more favorable the investment alternative.

b. The internal rate of return is the rate that will produce a zero net present value.

c. All other things being equal, a favorable investment decision is signaled when the internal rate of return is higher than a company's required rate of return.

d. When the net present value is positive, the internal rate of return is lower than the required rate of return.

Question

Business

Lucian Branch

5 September, 18:30

Which of the following statements regarding an internal rate of return analysis is false?

a. All other things being equal, the higher the internal rate of return the more favorable the investment alternative.

b. The internal rate of return is the rate that will produce a zero net present value.

c. All other things being equal, a favorable investment decision is signaled when the internal rate of return is higher than a company's required rate of return.

d. When the net present value is positive, the internal rate of return is lower than the required rate of return.

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Answers (1)

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Gill · Answer 1

Answer: Option D

Explanation: Internal rate of return, denoted as IRR, is the rate at which the net present value of a capital investment is zero. It is the rate at which the cash flows of the investment are discounted back to calculate the present value.

While, required rate of return is that return which an investor expects to achieve over time from a capital project.

Thus, one would only select a capital project only if the NPV of a project is positive which can only happen when the return on investment, that is, IRR, is greater than cost of capital, that is, required rate of return.