Question

Can NPV be positive if IRR < cost of capital? Explain.

Can NPV be positive if IRR < cost of capital? Explain.

Homework Answers

Answer #1

NPV:

NPV = PV of Cash Inflows - PV of Cash Outflows
If NPV > 0 , Project can be accepted
NPV = 0 , Indifference point. Project can be accepted/ Rejected.
NPV < 0 , Project will be rejected.

IRR:

IRR is the Rate at which PV of Cash Inflows are equal to PV of Cash Outflows.

IRR = Rate at which least +ve NPV + [ NPV at that Rate / Change in NPV due to 1% inc in disc rate ] * 1%

If IRR > Cost of Capital - Project can be accepted
IRR = Cost of Capital - Indifferebce Point - Project will be accepted / Rejected
IRR < Cost of Capital - Project will be erejected

If IRR < Cost of capital, NPV will be negitive always.

Pls do rate, if the answer is correct and comment, if any further assistance is required.

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