Question

. When determining whether a particular proposed project in a foreign country is creating value for the shareholders, we need to: a. make sure the project has a positive NPV. b. make sure the project has a foreign currency IRR that is greater than the foreign cost of capital. c. make sure the project has a domestic currency IRR that is greater than the domestic cost of capital. d. All of the above. e. None of the above.

Answer 1

The correct option is D, All of the above options are correct.

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NPV and IRR are two important tools in capital budgeting, which are helpful for the managers in deciding feasibility of the project.

NPV is the difference between PV of cash inflow from the project and cash outflow.

And IRR is the rate of return at which we discount all the cash inflow the resulting NPV will be zero.

The decision rule for NPV is the NPV must be greater than 1 in order to accept the project, and for IRR it must be greater than required rate, or cost of capital.

In this case, the company must ensure that both criteria meet before accepting the project.

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