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.
A) If Project A has a higher IRR than Project B, then Project A must also have a higher NPV.
B) The IRR calculation implicitly assumes that all cash flows are reinvested at the WACC.
C) The IRR calculation implicitly assumes that cash flows are withdrawn from the business rather than being reinvested in the business.
D) If a project has normal cash flows and its IRR exceeds its WACC, then the project's NPV must be positive.
E) If Project A has a higher IRR than Project B, then Project A must have the lower NPV.

Question

Quizplus · Accepted Answer

In a project with normal cash flows, if the IRR exceeds the WACC, then the project's NPV must be positive. This is because the IRR represents the discount rate that makes the NPV of the project equal to zero. Therefore, if the IRR is higher than the WACC (which represents the cost of capital), the project is expected to generate returns that are higher than the cost of capital and hence the project's NPV must be positive. Option A and E are incorrect because the IRR does not necessarily determine the NPV, as it depends on the magnitude and timing of cash flows. Option B and C are incorrect because the IRR assumes that cash flows are reinvested at the same rate as the project's cost of capital, not withdrawn from the business or reinvested at a different rate.

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