Question
A project your firm is considering has a zero NPV when a cost of capital of 8.5% is used, and also a zero NPV when
A project your firm is considering has a zero NPV when a cost of capital of 8.5% is used, and also a zero NPV when a cost of capital of 15% is used. The firm believes the appropriate cost of capital to use is actually 10%. Which of the following is true about the IRR method in which case, if any?
a.Because the average IRR of (8.5% +15%)/2 = 11.75exceed the cost of capital of 10%, the firm should accept the project.
b.The firm should reject the project because the IRR that is closer to the cost capital is 8.5%, which is less than the cost of capital.
c.The firm should not use the IRR method to evaluate the project and should instead use the NPV method.
d.We cannot determine if any of the above three statements are true, because the problems does not provide the information necessary to know the actual IRRs.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started