Cost of capital

True or false (and why?): The NPV technique uses the firm’s cost of capital in its calculation, but the IRR technique does not. Therefore, the cost of capital is relevant only if capital budgeting projects are evaluated using NPV.

False. Although the IRR technique does not use a cost of capital in its first step calculating the IRR, a cost of capital is required to proceed with the analysis. It is useless to calculate an IRR unless we can compare it to a cost of capital and see whether the return from the proposed project is sufficiently high to justify investing in it.