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

Question

Quizplus · Accepted Answer

The internal rate of return (IRR) is the discount rate that makes the present value of the project's cash inflows equal to its initial cost. Therefore, option D is the correct statement. Option A is incorrect because compounding the initial cost at the weighted average cost of capital (WACC) is used to calculate the project's terminal value, not the IRR. Option B is incorrect because compounding the cash inflows at the WACC is used to calculate the present value of the cash inflows, not the IRR. Option C is incorrect because if a project's IRR is smaller than the WACC, its NPV will be negative, not positive. Option E is incorrect because a project's IRR and NPV can have opposing signs.

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