Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.
A) The lower the cost of capital used to calculate a project's NPV, the lower the calculated NPV will be.
B) If a project's NPV is less than zero, then its IRR must be less than the cost of capital.
C) If a project's NPV is greater than zero, then its IRR must be less than zero.
D) The NPV of a relatively low-risk project should be found using a relatively high cost of capital.
E) A project's NPV is found by compounding the cash inflows at the IRR to find the terminal value (TV), then discounting the TV at the cost of capital.

Question

Quizplus · Accepted Answer

If a project's NPV is less than zero, then it means the project is not generating enough cash flows to cover the cost of capital. Therefore, the IRR of the project must be less than the cost of capital. However, if the NPV is greater than zero, it does not necessarily mean that the IRR is less than zero. In fact, the IRR will be greater than the cost of capital for a project with positive NPV. Therefore, choices A, C, and D are incorrect. Choice E also does not provide a comprehensive explanation of how to find NPV, as it only explains one step of the process. The correct way to find NPV is to discount all cash flows (including the initial outflow) at the cost of capital and then subtract the initial outflow from the present value of all future inflows.

Which of the Following Statements Is CORRECT? Assume That the Project