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"The management of XYZ Corporation is considering investing $ 10,000 in project X that has an internal rate of return of 12%
"The management of XYZ Corporation is considering investing $ 10,000 in project X that has an internal rate of return of 12%.Which of the following statements are true regarding the firm's recommended course of action? O a. Reject Project X if the cost of capital to finance the project is over 12% O b. Accept Project X if the cost of capital to finance the project is over 12%. O c. Reject Project X if the cost of capital to finance the project is Less than 12% O d. None of the above
Expert Solution
The correct answer is the first option i.e. option a.
Decision criteria using IRR
COC stands for Cost of capital
|
Sl. No. |
Criteria |
Decision |
|
1. |
If IRR > COC |
Accept the project |
|
2. |
If IRR < COC |
Reject the project |
|
3. |
If IRR = COC |
The Company is indifferent in accepting or rejecting the project. |
So, we go by the criterion at sl. no. 2 and as COC > IRR, we should reject the project. Hence, option a. is the correct answer.
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