Which one of the following statements related to the internal rate of return (IRR) is correct?
A) The IRR yields the same accept and reject decisions as the net present value method given mutually exclusive projects.
B) A project with an IRR equal to the required return would reduce the value of a firm if accepted.
C) The IRR is equal to the required return when the net present value is equal to zero.
D) Financing type projects should be accepted if the IRR exceeds the required return.
E) The average accounting return is a better method of analysis than the IRR from a financial point of view.

Question

Which one of the following statements related to the internal rate of return (IRR) is correct? 
A) The IRR yields the same accept and reject decisions as the net present value method given mutually exclusive projects. 
B) A project with an IRR equal to the required return would reduce the value of a firm if accepted. 
C) The IRR is equal to the required return when the net present value is equal to zero. 
D) Financing type projects should be accepted if the IRR exceeds the required return. 
E) The average accounting return is a better method of analysis than the IRR from a financial point of view.

Quizplus · Accepted Answer

The IRR is the discount rate at which the net present value of the project equals zero. Therefore, statement C is correct. Statement A is incorrect because the IRR and the net present value method can yield different accept/reject decisions for mutually exclusive projects. Statement B is incorrect because a project with an IRR equal to the required return would have a net present value of zero, and therefore would not affect the value of a firm if accepted. Statement D is incorrect because financing type projects should be accepted if their cost of capital is less than the IRR. Statement E is incorrect because the IRR is a superior method of analysis since it considers the time value of money, whereas the average accounting return does not.

Which One of the Following Statements Related to the Internal