If a project has an internal rate of return of 25% and a negative net present value,which of the following statements is true regarding the discount rate used for the net present value computation?

Question

Quizplus · Accepted Answer

A project with an internal rate of return (IRR) of 25% implies that the project is generating a return of 25% on its invested capital. A negative net present value (NPV) indicates that the discounted cash flows of the project are not sufficient to cover the initial investment. Therefore, the discount rate used for the NPV computation must be greater than the IRR, which is 25%, to result in a negative NPV. Thus, the required rate of return must have been greater than 25%. Option D is the correct answer.

If a Project Has an Internal Rate of Return of 25