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The following measures have been calculated to appraise a proposed project.
The internal rate of return is 15%.
The company’s cost of capital is 12%.
The payback period is 4 years.
Which of the following statements is correct?
A the payback is less than 5 years so the project should go ahead
B the IRR is higher than the cost of capital so the project should not go ahead
C the NPV of this project at the company’s cost of capital will be negative
D the IRR is positive so the project should go aheadSir, the answer for this question according to the mark scheme is B, but shouldnt the IRR be less than the cost of capital to decline the project? Is this question wrong?
Assuming that you have copied this out correctly, then none of the answers is correct.
Since the IRR is higher than the cost of capital, the project should go ahead.
(I hope this is not one of our questions – it is is then please let me know and I will correct it.)
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