A project manager is evaluating whether to proceed with a project that has a net present value (NPV) of -$10,000, an internal rate of return (IRR) of 4%, and a payback period of 3 years. The company's required rate of return is 6%. What should the project manager recommend?
Negative NPV and IRR less than required rate mean project destroys value.
Why this answer
The project has a negative NPV (-$10,000) and an IRR (4%) that is lower than the company's required rate of return (6%). Both of these financial criteria indicate the project will destroy value rather than create it. Therefore, the project manager should recommend rejecting the project based on standard capital budgeting principles.
Exam trap
CompTIA often tests the misconception that a short payback period alone justifies project acceptance, ignoring that NPV and IRR are the primary financial decision criteria and that payback period does not account for the time value of money or profitability after the payback period.
How to eliminate wrong answers
Option A is wrong because deferring for qualitative analysis is unnecessary when the quantitative financial criteria already provide a clear reject signal; qualitative factors cannot override a negative NPV and IRR below the hurdle rate. Option B is wrong because a payback period of 3 years, while less than 5, is not a sufficient justification to accept a project with a negative NPV and an IRR below the required rate of return; payback period ignores the time value of money and cash flows after the payback point. Option C is wrong because requesting additional funding would not change the project's inherent financial metrics; the NPV and IRR are calculated based on the project's cash flows and cost of capital, not the total funding amount.