The answer to the question is highlighted in red. Explanations are highlighted in green.
15. If a project’s internal rate of return (IRR) is _________ the firm’s required rate of return (r), then its net present value must be ________ zero.
a. greater than; less than
b.
equal to; equal to
c. greater than; equal to
d. equal to; less than
e. None of the above is a correct answer.
Remember that both the NPV technique and the IRR
technique must give the same accept/reject decision. In other words, if a
project has NPV > 0, it is acceptable and therefore IRR must be greater than
the firm’s required rate of return (i.e., IRR > r). Consequently, the
following relationships must always exist for NPV and IRR:
If
NPV > 0, IRR > r
If
NPV < 0, IRR < r
If
NPV = 0, IRR = r