Question

Two firms examined the same capital budgeting project which had an IRR of 16%. One firm accepted the project but the other rejected it. One of the firms must have made an incorrect decision.
Discuss the validity of this statement.

Answer 1

Answer:

the statement is not valid. A company can reject the 16% IRR project if it is less than its discount rate. the discount rate is the minimum acceptable rate at which a project can be accepted. so, if 16% is less than than the discount rate, the project would be rejected.

on the other hand, if the discount rate is less than 16%, the project should be accepted because the return of the project would be greater than the discount rate.

Explanation:

Internal rate of return is the discount rate that equates the after tax cash flows from an investment to the amount invested.