CAF-7 · Chapter 13 · Question 4 of 15
A project requires an initial investment of Rs. 100,000. It is expected to generate an Internal Rate of Return (IRR) of 15%. The company's cost of capital (WACC) is 12%. According to the IRR decision rule, the company should:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) Accept the project because the IRR (15%) is greater than the company's cost of capital (12%)
Explanation
The IRR is the discount rate that yields an NPV of zero. The standard decision rule is to accept the project if its IRR is strictly greater than the target required rate of return (cost of capital), as it will increase shareholder wealth.
More Introduction to Project Appraisal MCQs
- Q6How is an investment in 'Working Capital' treated at the end of a project's life in a standard Net Present Value (NPV) calculation?
- Q7A company is comparing two different machines that produce the exact same output but have different useful lives. Machine A lasts 3 years…
- Q8A business faces a choice between two mutually exclusive projects. Project X has an NPV of Rs. 50,000 and an IRR of 18%. Project Y has an…
- Q9In an NPV calculation involving taxation, how should the accounting depreciation of machinery be treated?
- Q10When dealing with inflation in an NPV calculation, what is the fundamental rule for matching cash flows to discount rates?