Question

Which of the following is false?

Group of answer choices

A project’s IRR increases as the cost of capital increases.

A project’s payback does not respond to changes in the cost of capital.

NPV-IRR conflict can be caused by scale differences.

The x-axis intercept of an NPV profile is the project’s IRR.

The modified IRR involves compounding all cash inflows to the terminal year, or the end of the project’s life at the cost of capital.

Answer 1

IRR is the implied rate of returns from the cash flows. At this rate, NPV will be zero. It is also called as break-even discount rate. At this rate, NPV will cross the horizontal axis. If IRR > Discount rate, NPV will be more than $0 and vice-versa. If NPV is more than $0, firm value will increase. It does not depend on the cost of capital. It depends only on the cash flows.

Hence, correct option is “A project’s IRR increases as the cost of capital increases”