A project has an internal rate of return of 14%, while the company's required rate of return is 11%. Based only on the IRR rule, the project should be:
Correct answer: B. Accepted because IRR exceeds the required return
- A. Rejected because IRR exceeds the required return
- B. Accepted because IRR exceeds the required return
- C. Rejected because IRR is a percentage measure
- D. Accepted only if its payback period is shortest
Explanation
Under the IRR decision rule, a project is normally accepted when its IRR is greater than the required rate of return. The difference indicates that the project is expected to earn more than its financing benchmark.
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About Business Finance
Business finance explains how organisations plan, obtain and use money while balancing risk, return and liquidity. Topics include financial statements, time value of money, budgeting, working capital, capital structure, sources of finance, investment appraisal and cost of capital. Capital budgeting evaluates long-term projects, whereas working capital manages day-to-day operations.
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