Question

Which of the following statements about evaluating a single project where costs occur before benefits is FALSE?

Group of answer choices

A. In an NPV profile that shows how NPV changes when cost of capital changes, NPV equals zero when the project discount rate equals IRR.

B. In general, the difference between the cost of capital and the internal rate of return (IRR) is the maximum amount of estimation error in the cost of capital estimate that can exist without altering the original decision.

C. If you are unsure of your cost of capital estimate, it is important to determine how sensitive your analysis is to errors in this estimate.

D. The internal rate of return (IRR) can provide information on how sensitive your analysis is to errors in the estimate of your cost of capital.

E. If the cost of capital estimate is more than the internal rate of return (IRR), the net present value (NPV) will be positive.

Answer 1

Option E ) FALSE

EXPLANATION

IRR Reflects The internal Rate of Return or we can say the return from the project .

Cost of capital is Cost expected to Occur if we decide to undertake the project .

For example - Return from a Project (IRR) is 30% (at 30% Cost of capital Npv will be 0)

so to make this project profitable or Positive NPV the Cost of Capital must be Lower than 30% .

If Cost of capital is more than 30% than the project will have a Negative NPV and thus should not be undertaken .

Option e ) says If the cost of capital is more than the IRR the Net present Value will be Positive - which is false . NPV will be Negative .

All other options are correct.