Question

What is the NPV of a project if IRR < discount rate (Assuming that the first cash flow is negative and all of the cash flows from the project are positive)?

		< 0
		> 0
		= 0
		None

Answer 1

Answer: <0

At IRR, NPV = 0

PV of Cash Inflows = PV of Cash Outflows

IRR gives the rate of return generated by the project.

A project has to be accepted only if it generates the return atleast equal to Cost of Capital.

i.e., A project has to be accepted only if the IRR is equal to or greater than Discount Rate.

If IRR < Discount Rate, the project is generating Return less than the Cost of Capital.

Therefore, NPV will be negative, i.e., NPV<0