The relationship between NPV and IRR is such that :
A) both approaches always provide the same ranking of alternatives
B) the IRR of a project is equal to the firm's cost of capital when the NPV of a project is $0
C) if the NPV of a project is negative,then the IRR must be greater than the cost of capital
D) all of the above
E) none of the above

Question

Quizplus · Accepted Answer

The IRR is the discount rate that makes the present value of a project's cash inflows equal to the present value of its cash outflows. When a project's NPV is $0, it means that the cash inflows equal the cash outflows, and therefore the IRR is equal to the firm's cost of capital. However, it is possible for the rankings produced by NPV and IRR to differ if the projects being compared have different cash flow patterns. Option A is not true, as the rankings produced by NPV and IRR can be different. Option C is also not always true, as the IRR can be lower than the cost of capital even when the NPV is negative.

The Relationship Between NPV and IRR Is Such That