[Never_Give_Up1]

So I am working thought some questions and I need some clarification if someone can shed some light.

A multi period project has a positive NPV. Which of the following statements is correct regarding its required rate of return?

A) Less than the company’s WACC

B) Less than the Project IRR

C) Greater than the company’s WACC

D) Greater than the Project IRR

I selected D. Because the required rate of return should be higher than the IRR for the project to have a positive NPV. I got the question wrong… what am I missing? The answer says that the required rate of return should be less than IRR. Wouldn’t that result in a loss on the project? Where am I going wrong on this?

FAR - 81
REG - 81
AUD - 82
BEC - 81

Ethics - Done
State License Exam - Done

License - Licensed CPA in Utah

[SeattleAccountant]

Answer #b is correct b/c:

If NPV>0 it means that IRR>required hurdle rate (which means that our internal rate of return had yielded better than required hurdle rate and this is why we have positive NPV). Said in other way, required rate of return was less than IRR (choice b).

If NPV=0, IRR=required rate of return.

If NPV<0, IRR<required rate of return (investment yields too little compared to required hurdle rate).

Becker Class of Jan - Aug 2013: FARB DONE!!!!
CPA license pending 🙂

[Never_Give_Up1]

Perfect thanks Seattle! That clears it up!

FAR - 81
REG - 81
AUD - 82
BEC - 81

Ethics - Done
State License Exam - Done

License - Licensed CPA in Utah

[jasonrobbins]

The required rate of return is the hurdle rate. If a project has a IRR greater than the hurdle rate, then you accept the project (all things equal). If the hurdle rate is less than the IRR, then you reject.

If you have a positive NPV, then your IRR is less than the hurdle rate because the IRR is just where your NPV would equal 0.

I explained that horribly so if someone else wants to chime in, please do…

AUD- 97 1x
REG- 81 1x
BEC- 79 1x
FAR- 88 1x

DONE!

10/1/12 to 2/28/14

[SeattleAccountant]

@Jason “If you have a positive NPV, then your hurdle rate is above the IRR because the IRR is just where your NPV would equal 0”

Actually, it is the over way around, LOL

If you have positive NPV, your hurdle rate (return we desire to get from project) is lower than IRR (return we get from project) = all in all, we did better and not only reached our goal of earning hurdle, but more.

NOTE: Oh, I see you've edited your post, now it is correct.

Becker Class of Jan - Aug 2013: FARB DONE!!!!
CPA license pending 🙂

[peetree]

Seattle has it.

You got this!

HOME STRETCH FOR BOTH OF US!

FAR 02/21/13 - 95
REG 07/02/13 - 87
AUD 08/02/13 - 94
BEC 08/30/13 - 85
Ethics Exam - 90

Illinois candidate awaiting his license

Used Becker Self Study | Ninja Audio | Becker Flash Cards | Ninja Notes | Wiley Test Bank

[jasonrobbins]

Yeah, I posted it and I was like….da** wait a minute, I said that backwards!

AUD- 97 1x
REG- 81 1x
BEC- 79 1x
FAR- 88 1x

DONE!

10/1/12 to 2/28/14

[SeattleAccountant]

Whew, I have exam tomorrow, I better know this, hahaaa!

Becker Class of Jan - Aug 2013: FARB DONE!!!!
CPA license pending 🙂

[jasonrobbins]

I have mine Friday, good luck to you both!

AUD- 97 1x
REG- 81 1x
BEC- 79 1x
FAR- 88 1x

DONE!

10/1/12 to 2/28/14

[Zaq]

Good luck guys!

FAR: 50, 76!
REG: 74... (ouch baby, very ouch), 76!
AUD: 65, 91!?
BEC: 80! Aaaand doneskies!

May 2012 to August 2013. Can't believe it's over.

[Author]

Replies