NPY will be negative if IRR is less than cost of capital?

CFA Level I Corporate Finance
#1

hey there eveyone,

English is not my first language, so i have a hard time trying to understand this question. Why is NPY will be negative if IRR is less than cost of capital? Could someone please explain or point where should i look up in schweser notes.

also, the question is in schweser notes page.36 number 5

many thanks :slightly_smiling_face:

#2

I presume that you mean NP V , not NP_Y_.

Think of an investment with normal cash flows:

  • Initial investment (outflow): $1,000
  • Annual inflow for each of 10 years: $120

If the cost of capital is 5%, then the NPV is −$70.

To get an NPV of $0 (which is the goal of IRR), you need a higher present value for the inflows: you need to discount them at a lower rate.

Thus, IRR < cost of capital.

#3

Thanks for clearing that up. I see how it works now.

And yes, i did mean NPV, not NPY. That was embarrassing XD.

#4

You’re quite welcome.