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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
BuyFindarrow_forward

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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Using IRR, a project is rejected if the IRR

  1. a. is equal to the required rate of return.
  2. b. is less than the required rate of return.
  3. c. is greater than the cost of capital.
  4. d. is greater than the required rate of return.
  5. e. produces an NPV equal to zero.

To determine

Identify the situation when a project is rejected using IRR.

Explanation

Internal Rate of Return:

An interest rate at which the present value of an investment’s cash inflows is equal to the present value cost of the investment is known as internal rate of return. The value of NPV is 0 in case of an internal rate of return.

b.

Project is not selected if IRR is less than required return rate. The project will not recover its cost, which means the present value of cash outflow is more than the present of cash inflow. Therefore, option b is the correct answer.

a.

The project may be accepted or rejected if IRR is equal to the required rate of return because it is situation of break-even...

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