The IRR decision rule can be reversed because A. the IRR is greater than 100% B....

The IRR decision rule can be reversed because

A. the IRR is greater than 100%

B. the NPV rule is not the same as the IRR

C. instead of an investment project it is a financing project

D. the IRR is based on a mutually exclusive investment

Solutions

Expert Solution

C. instead of an investment project it is a financing project

The decision rule of Internal Rate of Return is that , the project should be accepted if the IRR is greater than the cost of capital and If the IRR is less than the cost of capital, the project must be rejected.

This decision rule can be reversed if the project is a financing project instead of an investment project. The type of the project to be invested in is a major factor in taking project decision. Financing project means a project that can be substituted for borrowing. In the case of financing projects, the decision rule of IRR is reversed. Another situation when IRR is reversed is when cash flow order is reversed.

Example : If the project has borrowing rate of 20%, and the firm can borrow from bank at 15%, the project will be rejected. Here when the IRR is more than discount rate, the project is rejected. This is the reverse of general IRR decision rule.

In all other situations, the general IRR rule is applicable.

jeff jeffy answered 1 year ago

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