Question

1. If an investment’s NPV is negative, its IRR must be negative also.

True of false?

Answer 1

False

If Net Present value (NPV) is negative then IRR can be negative or positive.

The net present value is influenced by cost of capital of the firm, while Internal rate of return is independent average return of the project cash flows.

Net present value refers to the difference between the Present value of all the cash flows that the project is going to generate over the year and initial investment of the project. The cash flows of each year is multiplied by discounted rate which is cost of capital and the sum of all the resulting values is the Net present value.

Internal rate of return is the average rate of return per year that the project is going to generate over the periods. It is unaffected by cost of capital, thus it can be positive or negative even when NPV is neagtive.