Question

A company takes on a project that has an IRR of 10% which is the same as its cost of capital. Is this a good decision?

Select one:

a. No. Only projects with positive NPV’s should be accepted.

b. Perhaps, depending on the situation. This project has an NPV of zero and though not increasing the wealth of the company it may place the company in a better strategic position in the business environment.

c. Depends on the payback period of the project.

d. No. In such cases, the company should seek a vote from its shareholders before a decision to go ahead should be taken.

Answer 1

The answer is Option B (Perhaps, depending upon the situation. The project has an NPV of zero and though not increasing the wealth of the company, it mapy place the company in a better strategic position in the business environment.)
This means that even though the project is not making any value additions, it can offer other strategic edges which is beneficial in the long run of the company.

Option A is wrong since positive NPV is not the only criteria for making a project decision. NPV may be of +$1, but that doesn't mean we should accept the project.

Option C is wrong since the payback period is also of one of the criteria & payback period is not mentioned in the problem too.

Option D is wrong since these decisions are considered by the top management of the company.