Which of the following statements is true? If the NPV is less than $0, the disco
ID: 2743877 • Letter: W
Question
Which of the following statements is true?
If the NPV is less than $0, the discount rate was equal to the internal rate of return
If the NPV is equal to 0, the discount rate was less than the internal rate of return
If the NPV is equal to 0, the discount rate was greater than the Internal rate of Return.
None of the above
If the NPV is less than $0, the discount rate was equal to the internal rate of return
2.If the NPV is equal to 0, the discount rate was less than the internal rate of return
3.If the NPV is equal to 0, the discount rate was greater than the Internal rate of Return.
4.None of the above
Explanation / Answer
Answer: Option-1
The IRR (Internal rate of return) is the discounting rate on which the NPV of the project is zero .
i,e.: Cash inflow = Cash outflow.
NPV becomes negative when earnings rate is lower than the discount rate.
Therefore considering IRR as discount rate there is no way to push NPV below zero or positive. Rate of return can positive still NPV may be zero where discount rate is more than rate of return.
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