Project A has an internal rate of return (IRR)of 15 percent.Project B has an IRR of 14 percent.Both projects have a required return of 12 percent.Which of the following statements is most correct?
A) Both projects have a positive net present value (NPV).
B) Project A must have a higher NPV than project B.
C) If the required return were less than 12 percent, Project B would have a higher IRR than Project A.
D) Project B has a higher profitability index than Project A.

Question

Quizplus · Accepted Answer

Both projects have an IRR higher than the required return, indicating that the cash flows generated by the projects are sufficient to provide a return higher than the opportunity cost of capital. Therefore, both projects must generate a positive NPV. Option B is not necessarily true as the size and timing of cash flows may differ between the projects. Option C is incorrect as the IRR of a project is independent of the required return. Option D is not necessarily true as the profitability index depends on the size of the investment and the magnitude of the cash flows generated by the projects.

Project a Has an Internal Rate of Return (IRR)of 15