Session 11: Corporate Finance Reading 44: Capital Budgeting
LOS e: Explain the NPV profile, compare and contrast the NPV and IRR methods when evaluating independent and mutually exclusive projects, and describe the problems associated with each of the evaluation methods.
If the calculated net present value (NPV) is negative, which of the following must be CORRECT. The discount rate used is:
A) |
less than the internal rate of return (IRR). | |
B) |
greater than the internal rate of return (IRR). | |
C) |
equal to the internal rate of return (IRR). | |
When the NPV = 0, this means the discount rate used is equal to the IRR. If a discount rate is used that is higher than the IRR, the NPV will be negative. Conversely, if a discount rate is used that is lower than the IRR, the NPV will be positive. |