Which of the following statements regarding an internal rate of return analysis

Question

Which of the following statements regarding an internal rate of return analysis is false?

a) All other things being equal, the higher the internal rate of return the more favorable the investment alternative.

b) The internal rate of return is the rate that will produce a zero net present value.

c) All other things being equal, a favorable investment decision is signaled when the internal rate of return is higher than a company's required rate of return.

d) When the net present value is positive, the internal rate of return is lower than the required rate of return.

a) All other things being equal, the higher the internal rate of return the more favorable the investment alternative.

Explanation / Answer

Answer:d) When the net present value is positive, the internal rate of return is lower than the required rate of return.

Because "The NPV will be positive if the IRR is greater than the cost of capital. The other statements are true. The IRR can be positive (>0), but less than the cost of capital, thus resulting in a negative NPV. The IRR method is affected by the multiple IRR problem. One definition of the IRR is the rate of return for which the NPV of a project is zero.

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