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CFA Level I · CFA Level I Exam · Capital Investments and Capital Allocation

A company evaluates a single stand-alone project with conventional cash flows (one initial outflow followed by inflows). The project's internal rate of return exceeds the company's cost of capital. The decision that is most likely correct is to:

The company should accept the project because its NPV is positive. With conventional cash flows and a stand-alone project, an IRR above the cost of capital means discounting at the cost of capital gives a positive NPV, so both decision rules agree.

  1. Areject the project because the NPV is negative
  2. Baccept the project because the NPV is positiveCorrect
  3. Caccept the project only if its payback period is shorter than its discounted payback period

Explanation

For a stand-alone project with conventional cash flows, IRR above the required rate means NPV is positive at the cost of capital. The NPV rule therefore says to accept. Rejecting would contradict the equivalence of the two rules, and payback comparisons are not the decision criterion.

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