Question

If the Net Present Value of a particular investment is negative, and the Corporate Rate of Return is 12%, then the IRR must be what?

	1.	Any of the above is possible
	2.	Unable to determine due to lack of information
	3.	Lower than 12%
	4.	Higher than 12%
	5.	Equal to 12%

Answer 1

The correct answer is Lower than 12%

The Net present value is the present value of all the cash flows less initial investments and the cash flows are discounted at a particular rate of return and the Internal rate of return is the annual rate of return at which the cash flows are discounted comes equal to initial investment.

The IRR will be less than 12%when NPV is negative because IRR will decrease at greater percentage rate as it assumes that the cash flows are invested at IRR rather than cost of capital.