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 discounting the cash inflows at the WACC to find the present value (PV), then compounding this PV to find the IRR.
B) If a project's IRR is greater than the WACC, then its NPV must be negative.
C) To find a project's IRR, we must solve for the discount rate that causes the PV of the inflows to equal the PV of the project's costs.
D) To find a project's IRR, we must find a discount rate that is equal to the WACC.
E) A project's regular IRR is found by compounding the cash inflows at the WACC to find the terminal value (TV), then discounting this TV at the WACC.

Question

Quizplus · Accepted Answer

The internal rate of return (IRR) is the discount rate that makes the present value (PV) of the expected cash inflows equal to the PV of the expected cash outflows of a project. Therefore, to find a project's IRR, we must solve for the discount rate that causes the PV of the inflows to equal the PV of the project's costs. Option A is incorrect because the regular IRR is found by solving for the discount rate that equates the PV of the inflows to the PV of the outflows, not by discounting the inflows at the WACC. Option B is incorrect because if a project's IRR is greater than the WACC, then its NPV must be positive, not negative. Option D is incorrect because the IRR is not necessarily equal to the WACC, which is the minimum rate of return required by investors. Option E is incorrect because we cannot find the IRR by compounding the cash inflows at the WACC to find the terminal value and then discounting this TV at the WACC.

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