At what discount rate would you be indifferent between accepting a project and rejecting it?

• A. At the rate where the project's internal rate of return (IRR) is negative
• B. At the rate where the project's net present value (NPV) equals zero
• C. At the rate where the project's payback period equals its useful life
• D. At the rate where the project's future value equals its initial investment

Answer: (B)

Verified step by step guidance

1. Understand the concept of Net Present Value (NPV): NPV is the difference between the present value of cash inflows and the present value of cash outflows over a period of time. A project is typically accepted if its NPV is positive, as it indicates profitability.
2. Understand the concept of Internal Rate of Return (IRR): IRR is the discount rate at which the NPV of a project equals zero. It represents the break-even rate of return for the project.
3. Identify the condition for indifference: A decision-maker would be indifferent between accepting and rejecting a project when the NPV equals zero. This is because, at this point, the project neither adds nor subtracts value.
4. Relate the discount rate to the NPV: The discount rate at which the NPV equals zero is the project's IRR. This is the critical rate where the project's cash inflows, discounted at this rate, exactly equal the initial investment.
5. Conclude the correct answer: The discount rate at which you would be indifferent between accepting and rejecting a project is the rate where the NPV equals zero, which is also the IRR of the project.