You are considering a project with conventional cash flows.The IRR is 12.6 percent,NPV is -$198,and the payback period is 2.87 years.Which one of the following statements is correct given this information?
A)The discount rate used in computing the net present value was less than 12.6 percent.
B)The discounted payback period will have to be less than 2.87 years.
C)The project life must be 2.87 years.
D)This project should be accepted based on the internal rate of return.
E)The required rate of return must be greater than 12.6 percent.

Question

Quizplus · Accepted Answer

Since the NPV is negative, the discount rate (or required rate of return) must be higher than the IRR of 12.6% for the NPV to be negative. This is because NPV decreases as the discount rate increases, and a positive IRR with a negative NPV indicates the discount rate exceeds the IRR.

You Are Considering a Project with Conventional Cash Flows