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)If Project A has a higher IRR than Project B, then Project A must have the lower NPV.
B)If Project A has a higher IRR than Project B, then Project A must also have a higher NPV.
C)The IRR calculation implicitly assumes that all cash flows are reinvested at the WACC.
D)If a project has normal cash flows and its IRR exceeds its WACC, then the project's NPV must be positive.

Question

Quizplus · Accepted Answer

If a project has normal cash flows (i.e. one outflow followed by a series of inflows) and its IRR exceeds its WACC, then the project's NPV must be positive. This is because the IRR represents the discount rate at which the project's cash inflows equal its outflows, so any discount rate lower than the IRR will result in a positive NPV. The other statements are incorrect: A is false because a higher IRR indicates a higher expected return, which would result in a higher NPV, not a lower one; B is also false for the same reason; and C is incorrect because the IRR calculation assumes that cash inflows are reinvested at the IRR, not the WACC.

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