If a Project's expected rate of return exceeds its opportunity cost of capital, one would expect:
A)The profitability index to exceed 1.0
B)The opportunity cost of capital to be too low
C)The IRR to exceed the opportunity cost of capital
D)The NPV to be zero

Question

Quizplus · Accepted Answer

The expected rate of return of the project exceeding its opportunity cost of capital indicates that the project is generating more returns than what the company could have earned by investing in other alternatives with similar risks. In other words, the project has a positive net present value (NPV). A project's internal rate of return (IRR) is the discount rate that equates the present value of future cash inflows to the initial investment. If the IRR exceeds the opportunity cost of capital, it indicates that the project is generating returns greater than the required rate of return, thereby making it a profitable opportunity. Therefore, the correct choice is C.

If a Project's Expected Rate of Return Exceeds Its Opportunity