What financial metric indicates that capital should be invested in a project?

• A. If IRR is equal to WACC
• B. If IRR is lower than WACC
• C. If IRR is higher than WACC
• D. If WACC is higher than IRR

Answer: (C)

An investment in a project is typically considered viable when the Internal Rate of Return (IRR) exceeds the Weighted Average Cost of Capital (WACC). The IRR represents the expected rate of return generated by the project, while WACC reflects the average rate of return that the company must pay to its investors for funding. When the IRR is higher than the WACC, it indicates that the project is expected to generate returns greater than the cost of financing it. This excess return suggests that the project will create value for the company and its shareholders, making it a favorable investment.

In contrast, scenarios where the IRR is equal to or lower than the WACC generally signal that the project may not meet the necessary return thresholds to justify the investment. If the IRR is lower than the WACC, it implies that the project would not generate adequate returns to cover its financing costs, which is detrimental to the value of the firm. Therefore, the correct answer focuses on the principle of investing in projects that promise returns exceeding the overall cost of capital.