Explore BrainMass

Explore BrainMass

    IRR was lower than the cost of capital

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    Is there any reason a company would make an investment when the IRR was lower than the cost of capital?

    © BrainMass Inc. brainmass.com June 3, 2020, 7:12 pm ad1c9bdddf
    https://brainmass.com/business/capital-budgeting/irr-was-lower-than-the-cost-of-capital-89611

    Solution Preview

    IRR is a discount rate: the rate at which the present value of a series of investments is equal to the present value of the returns on those investments. An investment should be accepted if it is higher than the required return; if it is lower, the project is not acceptable.
    Thus generally any project which has IRR less tha the cost of capital is not taken as the NPV is less than zero.

    An important drawback with the Internal Rate of Return is in the case of Mutually Exclusive projects. If two investments, X, and Y, are mutually exclusive, then accepting one of them means we cannot accept the other. Given that, a ...

    Solution Summary

    This discusses the situation of IRR lower than the cost of capital

    $2.19

    ADVERTISEMENT