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.

Question

Quizplus · Accepted Answer

If a project's NPV is less than zero, it means that the initial outflow of cash exceeds the present value of the expected inflows, discounted at the cost of capital. To find the IRR, we need to find the discount rate at which the project's NPV is zero. Since the NPV is negative, the IRR must be less than the cost of capital. Therefore, statement B is correct. The other statements are not correct. Statement A is incorrect because the opposite is true - the lower the cost of capital, the higher the calculated NPV. Statement C is incorrect because if the NPV is greater than zero, it means that the project is generating positive value, and the IRR must be greater than the cost of capital. Statement D is incorrect because a low-risk project should be discounted at a low cost of capital, which reflects the low risk. Statement E is incorrect because it is a confusing and convoluted way of computing the NPV - the correct way is to discount the expected cash inflows at the cost of capital and subtract the initial outflow.

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