The relationship between NPV and IRR is such that:
A) both approaches always provide the same ranking of alternative investment projects.
B) the IRR of a project is equal to the firm's cost of capital if the NPV of a project is $0.
C) if the NPV of a project is negative, the IRR must be greater than the cost of capital.
D) none of the above

Question

Quizplus · Accepted Answer

The statement in option B is true. If the NPV of a project is $0, this means that the cash inflows are equal to the initial cost of the project. At this point, the IRR would be equal to the firm's cost of capital, as this is the rate at which the project's cash inflows would equal the cost of the project, resulting in zero NPV. Option A is incorrect because NPV and IRR may provide different rankings of investment projects when the projects have different sizes and timing of cash flows. Option C is inaccurate as a project with negative NPV has cash outflows that exceed cash inflows, and an IRR greater than the cost of capital would further decrease the NPV. Finally, option D is false as option B is true.

The Relationship Between NPV and IRR Is Such That