Asked by Andrea Puentes on Jul 07, 2024
Verified
A stand-alone project should be undertaken only if:
A) the cost of capital is greater than the project's IRR.
B) the cost of capital is equal to the project's IRR.
C) the cost of capital is less than the project's IRR.
D) the NPV of the project is zero.
Stand-Alone Project
In capital budgeting, a project with no competition either for the task it is to accomplish or for resources.
Cost of Capital
The rate of return a company must pay to its investors for the use of their capital, essentially the cost of financing and investing in the company's assets.
NPV
Net present value. A capital budgeting technique that rates projects according to the total present value of all their associated cash flows. The higher the total or net present value, the better.
- Describe the idea and process for determining the Internal Rate of Return (IRR).
Verified Answer
GM
Gavin MahanJul 13, 2024
Final Answer :
C
Explanation :
A stand-alone project should be undertaken if its IRR is greater than the cost of capital. This means that the project is expected to generate returns that exceed what investors could earn elsewhere with their money. In this case, the NPV of the project will be positive. On the other hand, if the cost of capital is greater than the project's IRR, the project should be rejected as it will not generate enough returns to meet the required rate of return. Similarly, if the cost of capital is equal to the project's IRR or the NPV of the project is zero, it is not the best choice since there is no positive net present value to justify the investment.
Learning Objectives
- Describe the idea and process for determining the Internal Rate of Return (IRR).