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) A project's regular IRR is found by compounding the cash inflows at the cost of capital to find the present value (PV), then discounting the TV to find the IRR.
B) If a project's IRR is smaller than the cost of capital, then its NPV will be positive.
C) A project's IRR is the discount rate that causes the PV of the inflows to equal the project's cost.
D) If a project's IRR is positive, then its NPV must also be positive.
E) A project's regular IRR is found by compounding the initial cost at the cost of capital to find the terminal value (TV), then discounting the TV at the cost of capital.

Question

Quizplus · Accepted Answer

The Internal Rate of Return (IRR) is the discount rate at which the net present value (NPV) of a project is equal to zero. In other words, it is the discount rate at which the present value of future cash inflows equals the initial cost of the project. Therefore, statement C is correct. Statement A is incorrect because it describes the formula for calculating the Modified IRR (MIRR), which involves compounding the cash inflows and outflows separately. Statement B is incorrect because a project's NPV will be negative if its IRR is smaller than the cost of capital. Statement D is incorrect because a project's NPV can be positive, negative, or zero at any given IRR. Statement E is incorrect because it describes the formula for calculating the Terminal Value (TV), which is not used in the calculation of the IRR.

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