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The IRR is the discount rate at which the NPV of the project is zero. Since the present value of both the project’s cash inflows and cash outflows are the same ($15.8 million) when a discount rate of 14% is used, the project's NPV is zero at that discount rate. Thus, the internal rate of return is the same as the hurdle rate, and there is no new knowledge to be gained by comparing the two.
Since the present values of both the project's cash inflows and cash outflows are the same ($15.8 million), the NPV of this project is zero, when a discount rate of 14% is used. If the discount rate the company has used as a hurdle rate is truly representative of its cost of capital and the anticipated risk in the project, this is not a project the company should embark upon, because it will not earn any profit for the shareholders. So the company should evaluate whether the 14% that it used as its hurdle rate is reasonable. To do that, it should compare the company’s cost of capital with the hurdle rate it used. This is the only answer choice that includes comparing the company’s cost of capital with the hurdle rate. It is not clear why a comparison of the internal rate of return with the hurdle rate is included in this answer choice. The IRR is the discount rate at which the NPV of the project is zero. Since the discount rate used was 14% and the project’s NPV is zero, 14% is also the project's internal rate of return. Therefore, the internal rate of return is the same as the hurdle rate, and there is no new knowledge to be gained by comparing the two. However, this answer choice is the best from among those given.
The contribution margin of a project is not a part of a capital budgeting analysis.
When the accounting rate of return method is used for capital budgeting, management sets a required accounting rate of return, and projects whose returns exceed that rate are considered acceptable. Comparison with the internal rate of return of the project would not be meaningful, because the internal rate of return is based on cash flow, whereas the accounting rate of return is based on accounting income.