33. Smartistry is considering a new $800,000 store expansion project. The company has set a required rate of return of 10% for all investment projects. After analysis, the internal rate of return (IRR) for the project is calculated to be 12%. What is the internal rate of return (IRR) based decision rule for this project?
Answer: D
If the internal rate of return (IRR) is greater than 10%, the project is considered acceptable.
The internal rate of return (IRR) of the project is 12%, which exceeds the required rate of return of 10%. Therefore, according to the IRR decision rule, the project is deemed acceptable.
A) If the internal rate of return (IRR) exceeds the initial $800,000 cost, the project is profitable.
This option is incorrect because the IRR decision rule does not compare the IRR to the initial cost of the project. Instead, it compares the IRR to the required rate of return. Profitability is assessed based on whether the IRR meets or exceeds this rate, not the initial investment amount.
B) If the internal rate of return (IRR) is less than 10%, the project is profitable.
This statement is incorrect. A project is not considered profitable if the IRR is less than the required rate of return of 10%. In fact, if the IRR is below this threshold, the project would be rejected based on the decision rule.
C) If the internal rate of return (IRR) equals 10%, the project will lose money.
This option is misleading. If the IRR equals the required rate of return, the project would break even, not necessarily lose money. The decision rule indicates that projects with an IRR equal to the required rate are acceptable but do not generate additional value.
D) If the internal rate of return (IRR) is greater than 10%, the project is considered acceptable.
This statement accurately reflects the IRR decision rule. Since the calculated IRR of 12% exceeds the required 10%, the project is considered acceptable and is likely to generate a return above the company's expectations.
Conclusion
The correct answer is option D, as it aligns with the internal rate of return decision-making framework used in capital budgeting. Options A, B, and C fail to accurately represent the criteria for project acceptance based on IRR, confirming that D is the only valid choice for determining the project's viability.