Project A has an internal rate of return (IRR) of 15 percent. Project B has an IRR of 14 percent. Both projects have a cost of capital of 12 percent. Which of the following statements is most correct?
A) Both projects have a positive net present value (NPV).
B) Project A must have a higher NPV than Project B.
C) If the cost of capital were less than 12 percent, Project B would have a higher IRR than Project A.
D) Statements a and c are correct.
E) Statements a, b, and c are correct.

Question

Quizplus · Accepted Answer

The IRR of a project is the discount rate at which the project's net present value (NPV) equals zero. If the cost of capital is less than the IRR, then the project has a positive NPV and is profitable. In this case, both Project A and Project B have IRRs that are greater than the cost of capital, so both projects have positive NPVs. However, we cannot conclude which project has a higher NPV without knowing the initial investment and cash flows of each project.

Option C is incorrect because the IRR is a function of the project's cash flows and does not depend on the cost of capital. If the cost of capital were less than the IRR, both projects would still have positive NPVs, but the difference between their IRRs and the cost of capital would be smaller.

Project a Has an Internal Rate of Return (IRR) of 15