General Studies · Capital Budgeting
A firm is considering a Capital Investment Decision and uses both Net Present Value (NPV) and Internal Rate of Return (IRR) methods. The project has a standard cash flow pattern (initial outflow, subsequent inflows). Which statement accurately explains the relationship between these two methods?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1If the project's NPV is positive, the project's IRR will be lower than the Cost of Capital.
- 2The IRR is the discount rate that makes the project's NPV equal to zero, and if IRR > Cost of Capital, then NPV > 0.✓
- 3IRR is always mathematically superior to NPV because it gives a percentage return rather than an absolute monetary value.
- 4If a project has multiple cash outflows, it will always have multiple IRR values, making the NPV method the only reliable tool.
Correct answer
The IRR is the discount rate that makes the project's NPV equal to zero, and if IRR > Cost of Capital, then NPV > 0.
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