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The following measures have been calculated to appraise a proposed project:
The internal rate of return is 12%
The return on capital employed is 16%
The payback period is 4 yearsWhich of the following statements is correct?
A) the payback is less than 5 years so the project should go ahead
B) the IRR is lower than the return on capital employed so the project should not go
ahead
C) the IRR is greater than the cost of capital so the project should go ahead
D) The IRR is positive so the project should go aheadThe given answer is C, but what I don’t understand is how did they conclude that the cost of capital is lower than the IRR? Which one of the given information tells us that?
Are you 100% certain that you have copied the question correctly?
If you are then although you can definitely say that the answer is not A, B, or D, you could not say the C is necessarily correct (because you would need to be told the cost of capital).
If you have copied it correctly then there is a mistake in whichever book you found it.
Thank you very much for your answer. I copied it correctly so there must be a mistake.
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