Internal rate of return and net present value are related in that: Internal rate of return...

Internal rate of return and net present value are related in that:

Internal rate of return formed the basis for the eventual development of the net present value theory.
Internal rate of return finds a discount rate that produces a net present value of zero.
Net present value formed the basis for the eventual development of the internal rate of return theory.
Net present value can only be used to evaluate irregular cash flows, whereas internal rate of return can only be used to evaluate normal (always positive) cash flows

Expert Solution

Answer is Option b i.e. Internal Rate of Return (IRR) and Net Present Value (NPV) are related in that Internal Rate of Return finds a discount rate that produces a net present value of zero.

Because IRR provides the return of an investment calculated as a percentage whereas NPV provides the return of an investment in monetary terms.

Decision on the basis of NPV and IRR is taken as follows.

Condition	Decision
Cost of Capital (k) > Internal Rate of Return (r)	Reject the project
Cost of Capital (k) = Internal Rate of Return (r)	Indifferent
Cost of Capital (k) < Internal Rate of Return (r)	Accept the project

Similarly, in case of NPV, NPV > 0 Accept the proposal ; NPV = 0 Indifference point ; NPV < 0 Reject the proposal

IRR is the discount rate at which NPV is zero. So, any rate at which NPV is greater than 0 will provide a positive NPV and a project with a positive NPV is considered profitable since the cost is recovered at that rate and additional profits can be earned.

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jeff jeffy answered 1 year ago

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