SIDC Module 12 Risks and returns question: project costing RM1,000,000 with inflows of RM300,000

SIDC Module 12Risks and returns

For a project costing RM1,000,000 with inflows of RM300,000, RM400,000 and RM500,000 over three years, the IRR is about 8.9%. If the cost of capital is 10%, the IRR rule says:

A reject, because the IRR is below the cost of capital
B accept, because the inflows exceed the outlay
C accept, because the IRR is positive
D reject, because the IRR is below the payback period in years

Show the answer and explanation

Answer: A. reject, because the IRR is below the cost of capital

The IRR is the discount rate that sets NPV to zero; here about 8.9%. The rule accepts a conventional project only if its IRR exceeds the cost of capital, and 8.9% < 10%, so reject, which agrees with the negative NPV at 10% (−RM21,037). A positive IRR only shows the project returns more than zero. Total inflows exceeding the outlay ignore discounting. Comparing a rate with a number of years is meaningless. Source: SIDC Module 12 Study Outline (Jul-Dec 2026) Topic 5 Risks and Returns, 5.2 Capital Budgeting; Brealey, Myers and Allen, Principles of Corporate Finance, ch. on NPV and other investment criteria (as at October 2026).

Common mistake

Accepting any project with a positive IRR. The hurdle is the cost of capital, not zero.

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Related SIDC Module 12 questions

A RM1,000,000 project returns RM300,000, RM400,000 and RM500,000 at the end of years 1, 2 and 3, earned evenly within each year. What is its simple payback period?Discounting the project's inflows of RM300,000, RM400,000 and RM500,000 (years 1 to 3) at 10% gives present values of RM272,727, RM330,579 and RM375,657. On a RM1,000,000 outlay, what is the discounted payback?Kenari Bhd can invest RM1,000,000 today for cash inflows of RM300,000, RM400,000 and RM500,000 at the end of years 1 to 3. Its cost of capital is 10%. What is the project's NPV and decision?

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Original study material mapped to the public SIDC Module 12 syllabus. Unofficial, not endorsed by SIDC or the SC. Verify figures and rules against current guidance before relying on them.