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Hotel ABC’s investment project has an IRR of 22%. Its NPV is 1337.50. Its investors’ hurdle...

  1. Hotel ABC’s investment project has an IRR of 22%. Its NPV is 1337.50. Its investors’ hurdle rate is 25%.Given this trend, ABC’s investors should _______in this project.

    a.

    not invest
    b.

    invest
    c.

    be indifferent to investing or not investing
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Answer #1

Option (c) is correct

Investor's should be indifferent to investing or not investing.

The rule is: If NPV is positive, then project should be accepted. And in case of IRR, if IRR is more than the hurdle rate then project should be selected.

Here, NPV is positive, indicating that the project should be accepted but IRR is less than the hurdle rate, which means that project should not be accepted. Because one method is accepting the project and the other is rejecting the project, so investor is indifferent to investing or not investing. He should select some other criteria.

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