When the net present value for a project is negative, the internal rate of return is _________ the cost of capital.
A) greater than
B) greater than or equal to
C) less than
D) equal to

Question

Quizplus · Accepted Answer

When the net present value (NPV) is negative, it means the project is not generating enough cash flows to cover the initial investment as well as the required rate of return (i.e. cost of capital). In order to make the project feasible, the internal rate of return (IRR) needs to be higher than the cost of capital so that the present value of cash inflows is greater than the present value of cash outflows. Therefore, if the NPV is negative, the IRR must be less than the cost of capital.

When the Net Present Value for a Project Is Negative