COST ACCOUNTING
CAPITAL BUDGETING
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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When IRR higher than the required rate of return.
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When IRR less than the required rate of return.
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When IRR equal to the required rate of return.
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When IRR equal to zero.
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Detailed explanation-1: -Generally, the higher the IRR, the better. However, a company may prefer a project with a lower IRR, as long as it still exceeds the cost of capital, because it has other intangible benefits, such as contributing to a bigger strategic plan or impeding competition.
Detailed explanation-2: -IRR can be used to make selection decision between two or more independent projects. The general rule followed for IRR: The higher the better. In other words, all other things being equal, the project with the highest IRR should be selected.
Detailed explanation-3: -A change in the required rate of return does not affect the internal rate of return of the project. This is because the IRR (and its calculation) is not dependent on the required rate of return of the project. The IRR solves for the rate of return that will make the net present value of the project equal to 0.