Question

If you are using a discount rate of 12% to evaluate the acquisition of a PET scanner and the IRR is 10%, what can you conclude about the NPV of the project? Would you recommend investing in the proposed project?

Answer 1

You can conclude about the NPV of the project that it will be negative if discount rate is 12% and IRR is 10%. IRR is the internal rate of return at which present value of cash inflows are equal to initial investment or cash outflow at year 0. so, if you discount cash inflows with IRR of 10% then present value of cash inflows and initial investment will be equal. if you discount those same cash inflows with higher discount rate of 12% then present value of cash inflows will be lower than initial investment and NPV of the project will be negative.

NPV is the net present value which is the difference between the present value of cash inflows and initial investment.

You should not invest in the proposed project because its NPV will be negative as discount rate of 12% is higher than IRR of 10%. project will generate losses.