Question

When applying the concept of present value to capital budgeting decisions, which of the following statements is TRUE?

Question 28 options:

	Internal rate of return cannot be computed when cash flows are unequal year to year
	A project with a higher IRR will be preferable over one with a lower IRR.
	A positive NPV means that a project earns less than the cost of capital on a project.
	Residual value is not included in the calculation of Net Present Value.

Answer 1

Ans: A project with a higher IRR will be preferable over one with a lower IRR.

Reason: The higher an internal rate of return, the more desirable an investment is to undertake. when comparing investment options, the investment with the highest IRR would probably be considered the best.

If a project's NPV is positive (> 0), the company can expect a profit and should consider moving forward with the investment.

While calculating the NPV, salvage value should be considered as a cash inflow at the end of the project.