Answer: Statement 3

## Explanation Let's analyze each statement: **Statement 1**: "The IRR assumes reinvestment of cash flows at the required rate of return." - This is **INCORRECT**. The IRR actually assumes reinvestment of cash flows at the IRR itself, not at the required rate of return (hurdle rate). This is a common misconception about IRR. **Statement 2**: "IRR is strongly preferred when NPV and IRR rank two mutually exclusive projects differently." - This is **INCORRECT**. When NPV and IRR give conflicting rankings for mutually exclusive projects, NPV is generally preferred because it directly measures the dollar value added to shareholders' wealth. IRR can be misleading due to issues like scale differences, timing differences, and multiple IRRs. **Statement 3**: "NPV is zero when IRR equals the hurdle rate." - This is **CORRECT**. By definition, the Internal Rate of Return (IRR) is the discount rate that makes the Net Present Value (NPV) equal to zero. When the IRR equals the hurdle rate (required rate of return), the NPV will be exactly zero. **Key Concepts**: - **NPV (Net Present Value)**: The sum of present values of all cash flows (inflows and outflows). - **IRR (Internal Rate of Return)**: The discount rate that makes NPV = 0. - **Hurdle Rate**: The minimum required rate of return for a project. **Why Statement 3 is correct**: - Mathematically: NPV = Σ[CF_t / (1+r)^t] = 0 when r = IRR - When the discount rate (hurdle rate) equals the IRR, the present value of cash inflows equals the present value of cash outflows, resulting in NPV = 0. **Answer**: C (Statement 3)

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