Which statement is true about IRR and WACC?

Which statement is true about IRR and WACC?

• A. IRR is the discount rate that yields a NPV of 0.
• B. WACC is the minimum required IRR for both debt and equity.
• C. IRR that exceeds the WACC is considered a positive project.
• D. WACC is the discount rate that yields NPV zero.

Answer: (A)

IRR is defined as the discount rate that makes the net present value of a project’s cash flows equal to zero. In other words, it’s the rate at which the inflows and outflows balance when you bring them to present value. This exact definition is why the statement is correct: solving the NPV equation for r where NPV = 0 yields the IRR, the rate of return the project would provide. WACC is the blended cost of financing the project from debt and equity and serves as a hurdle rate for decision making. It represents the minimum return needed to cover the firm’s overall cost of capital, not the rate that makes NPV zero. The relationship often cited is that if IRR exceeds WACC, the project tends to have a positive NPV, but the rate that zeroes NPV is specifically the IRR, not the WACC. The other statements either misdefine WACC or confuse the roles of IRR and the hurdle rate.

IRR is defined as the discount rate that makes the net present value of a project’s cash flows equal to zero. In other words, it’s the rate at which the inflows and outflows balance when you bring them to present value. This exact definition is why the statement is correct: solving the NPV equation for r where NPV = 0 yields the IRR, the rate of return the project would provide.

WACC is the blended cost of financing the project from debt and equity and serves as a hurdle rate for decision making. It represents the minimum return needed to cover the firm’s overall cost of capital, not the rate that makes NPV zero. The relationship often cited is that if IRR exceeds WACC, the project tends to have a positive NPV, but the rate that zeroes NPV is specifically the IRR, not the WACC. The other statements either misdefine WACC or confuse the roles of IRR and the hurdle rate.