An increase in the firm's cost of capital will decrease projects' NPVs, which could change the accept/reject decision for any potential project.However, such a change would have no impact on projects' IRRs.Therefore, the accept/reject decision under the IRR method is independent of the cost of capital.

Question

Quizplus · Accepted Answer

An increase in the firm's cost of capital will not necessarily have an impact on the accept/reject decision for potential projects under the IRR method. The IRR method compares the project's IRR to the cost of capital, and if the IRR is greater than the cost of capital, the project is accepted. Therefore, the decision is not independent of the cost of capital.

An Increase in the Firm's Cost of Capital Will Decrease