Question

You have analyzed a 10-year project and determined that it's net present worth (calculated at MARR=8%) is -$1,455,340.00. Which of the following statements must be true?

Question options:

	The project's IRR is 8%.
	The project's IRR is greater than 8%.
	The project's IRR is less than 8%.
	You cannot make any of the above judgments about this project's IRR from this information.

Answer 1

Answer - Project's IRR is less than 8%.

In the question, MARR is 8%.

At MARR of 8%, the NPW is -1,455,340. It means the NPW is negative. A negative net present value implies that at 8%, the present value of outflows is more than the present value of inflows.
For the calculation of IRR we use the trial and error method. At this given condition, we need to reduce the rate of interest to get a positive NPV. After getting the positive NPV we can use the interpolation formula to calculate IRR. In the interpolation formula we have to start with that rate of interest where the NPV is positive and that interest rate definitely will less than the MARR. In the question at 8%, the NPV is negative. To calculate positive NPV we have to decrease the rate of interest. It means we need to calculate NPV at a rate that is less than 8%.

Therefore, if the NPV at MARR is negative, the IRR will be definitely less than MARR.