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Select Any One Of the Following Options: If Net Present Value for a project is negative, thenProfitability Index > 1IRR < Cost of CapitalIRR = Cost of CapitalIRR > Cost of Capital

Question

Select Any One Of the Following Options: If Net Present Value for a project is negative, thenProfitability Index > 1IRR < Cost of CapitalIRR = Cost of CapitalIRR > Cost of Capital

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Solution

If the Net Present Value (NPV) for a project is negative, then the Internal Rate of Return (IRR) is less than the Cost of Capital. So, the correct option is "IRR < Cost of Capital".

Here's why:

  1. Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time. If the NPV is negative, it means the expected return on the project or investment is less than the required return or cost of capital.

  2. The Internal Rate of Return (IRR) is the discount rate that makes the NPV of all cash flows (both positive and negative) from a project or investment equal to zero. If the IRR is less than the cost of capital, it means the project or investment is not expected to yield a return greater than the cost of capital.

  3. Therefore, if the NPV is negative, it implies that the IRR is less than the cost of capital.

This problem has been solved

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