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 cost of capital.
C) The IRR calculation implicitly assumes that cash flows are withdrawn from the business rather than being reinvested in the business.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 cost of capital, 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

If a project has normal cash flows and its IRR exceeds its cost of capital, then the project's NPV must be positive. This is because the IRR represents the discount rate that would make the NPV of the project equal to zero. Therefore, if the IRR is higher than the cost of capital, the NPV will be positive. Choices A and E are incorrect because the relationship between IRR and NPV depends on the size and timing of the cash flows, and a higher IRR does not necessarily imply a higher or lower NPV. Choice B is incorrect because the IRR only assumes that the cash flows are reinvested at the IRR itself, not at the cost of capital. Choice C is incorrect because the IRR calculation assumes that all cash flows generated by the project are reinvested in the project, not withdrawn from the business.

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