[YBD215]

Let me start with saying thank you all in advance.

I am using Becker and it has just confused me greatly on this topic. The question:

A multiperiod project has a positive net present value. Which of the following statements is correct regarding its required rate of return?

a. Greater than the company’s weighted average cost of capital.

b. Less than the project’s internal rate of return.

c. Greater than the project’s internal rate of return.

d. Less than the company’s weighted average cost of capital.

Explanation

Choice “b” is correct. The required rate of return must be less than the project’s internal rate of return (IRR). The IRR is the rate earned by an investment that equates to a net present value (NPV) of zero. By definition, a project with a positive NPV will have an IRR greater than the required rate of return used to compute that NPV.

I thought IRR was the point that NPV = 0 and so you would want a rate of return higher than IRR to get NPV >1?

Lost on this now. Thank you again.