Question

If the NPV of a project with one sign reversal in negative, then the project's IRR ____________ the firm's required rate of return

could be greater or less than

is exactly equal to

must be greater than

must be less than

Answer 1

The correct answer is "could be greater or less than"

The One sign reversal in negative project menas that the cash flows of the project has only one negative cash outflow which is generally initial investment followed by positive cash inflows.

The Internal rate of return of the project shows the average rate of return that the project will give over the period of the time , it assumes that the cash flows will reinvested at the same rate of Internal rate of return.

The project internal rate of return can be greater or less than cost of capital as it depends on the cash inflows and outflows of the project and the cost of capital also. But, the firm should choose those projects which has higher IRR than cost of capital as it shows the return is larger than the cost.