The investment rule with the Internal Rate of Return states:
A) Take any investment opportunity whose IRR is less than the opportunity cost of capital. Turn down any opportunity whose IRR exceeds the opportunity cost of capital.
B) Forego any investment opportunity whose IRR exceeds the opportunity cost of capital. Take any opportunity whose IRR is less than the opportunity cost of capital.
C) Take any investment opportunity whose IRR exceeds the opportunity cost of capital. Turn down any opportunity whose IRR is less than the opportunity cost of capital.
D) None of the above

Question

Quizplus · Accepted Answer

The Internal Rate of Return (IRR) is the discount rate at which the net present value (NPV) of an investment is zero. Therefore, if the IRR exceeds the opportunity cost of capital, it means that the investment is expected to generate a return greater than the required minimum rate of return, and it should be taken. On the other hand, if the IRR is less than the opportunity cost of capital, the investment is not expected to generate a return high enough to cover the required rate of return, and it should be turned down. Therefore, choice C is the correct investment rule with the Internal Rate of Return.

The Investment Rule with the Internal Rate of Return States