In an assessment of the internal rate of return (r) of two projects the following results are obtained: r is 8% for Project A and 12% for Project B. What decisions should be followed if the opportunity cost of capital is 10%?
A) Accept A and reject B
B) Reject A and accept B
C) Reject both projects
D) Accept both projects

Question

Quizplus · Accepted Answer

The opportunity cost of capital is the minimum required return for an investment, so any project that generates a lower return than the opportunity cost should be rejected. In this case, Project A has a lower IRR than the opportunity cost of capital (8% < 10%), so it should be rejected. Project B, on the other hand, has a higher IRR than the opportunity cost of capital (12% > 10%), so it should be accepted. Therefore, the best choice is to reject A and accept B.

In an Assessment of the Internal Rate of Return (R)