A one-sign-reversal project should be accepted if it
A) generates an internal rate of return that is higher than the profitability index.
B) produces an internal rate of return that is greater than the firm's discount rate.
C) results in an internal rate of return that is above a project's equivalent annual annuity.
D) results in a modified internal rate of return that is higher than the internal rate of return.

Question

Quizplus · Accepted Answer

The internal rate of return (IRR) is the rate at which the net present value (NPV) of a project is zero. A one-sign-reversal project implies that the cash flows change sign only one time, from negative to positive or from positive to negative. Such projects may have multiple IRRs, but if the IRR is greater than the firm's discount rate, the project is expected to generate positive net present value and should be accepted. The profitability index (PI) and equivalent annual annuity (EAA) are other capital budgeting techniques, but they do not consider the time value of money, and are not suitable for evaluating projects with uneven cash flows. The modified internal rate of return (MIRR) adjusts the IRR to assume reinvestment at a specified rate, but it is not a common or preferred measure of profitability.

A One-Sign-Reversal Project Should Be Accepted If It