Which statement about IRR is true?

Which statement about IRR is true?

• A. The higher the IRR, the more attractive the project
• B. The lower the IRR, the more attractive the project
• C. IRR has no bearing on project decision
• D. IRR is always equal to the cost of capital

Answer: (A)

IRR is the rate that makes a project’s net present value zero, reflecting the project’s expected annual return. The higher this rate, the more the project looks like it earns above the cost of funding. Since the usual rule is to accept projects whose IRR exceeds the cost of capital (the hurdle rate), a higher IRR makes a project more attractive. The other statements don’t fit: IRR informs the decision, it isn’t always equal to the cost of capital (only at the exact break-even point with zero NPV), and having a lower IRR does not make a project more attractive.

IRR is the rate that makes a project’s net present value zero, reflecting the project’s expected annual return. The higher this rate, the more the project looks like it earns above the cost of funding. Since the usual rule is to accept projects whose IRR exceeds the cost of capital (the hurdle rate), a higher IRR makes a project more attractive. The other statements don’t fit: IRR informs the decision, it isn’t always equal to the cost of capital (only at the exact break-even point with zero NPV), and having a lower IRR does not make a project more attractive.