Question

Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.a. A project's regular IRR is found by compounding the cash inflows at the WACC to find the terminal value (TV), then discounting this TV at the WACC.b. A project's regular IRR is found by discounting the cash inflows at the WACC to find the present value (PV), then compounding this PV to find the IRR.c. If a project's IRR is greater than the WACC, then its NPV must be negative. d. To find a project's IRR, we must solve for the discount rate that causes the PV of the inflows to equal the PV of the project's costs.e. To find a project's IRR, we must find a discount rate that is equal to the WACC.

Answer 1

Answer:

d. To find a project's IRR, we must solve for the discount rate that causes the PV of the inflows to equal the PV of the project's costs

Explanation:

The internal rate of return, will be the rate at which the net present value of a project is zero.

net present value = present value fo the cash inflow - investment

using the IRR on the cash inflow we have a present value equal to the investment made, which makes the net present value equal to zero.

Therefore, the IRR is the maximun rate the project can yield

Answer 2

The statement that is right as regards project's IRR is D: To find a project's IRR, we must solve for the discount rate that causes the PV of the inflows to equal the PV of the project's costs.

• The internal rate of return rule can be regarded as the guideline that is required to follow when carrying out  evaluation on whether to proceed with a project or investment.

• To find a project's IRR, then the discount rate needs to be known because through this we can know how it makes PV of the inflows as well as PV of the project's costs to be equal.

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