Question

The treasurer of a large firm is considering investing $50 million in 10-year Treasury notes that...

The treasurer of a large firm is considering investing $50 million in 10-year Treasury notes that yield 8.5%. The firm’s WACC is 15%. Is this a negative-NPV project? Explain.

Answers:

A.

the required return depends on the risk of the investment
B.

the WACC is irrelevant because the investment has a different amount of risk
C.

yes, this is a negative-NPV investment
D.

no, this is a zero-NPV investment

A and B

A and C

A and D

B and C

B and D

C and D

all but A

all but B

all but C

all but D

all are true
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Homework Answers

Answer #1

A and C is the correct answer because

A : the required return depends on the risk of investment

If a investor wants to earn higher return he has to invest in riskier projects and not in riskfree investments as Treasury Notes

C : Yes,This is a negative NPV investment

We need 15% but we are getting only 8.5%

We are paying at WACC i.e 15% and investing that amount in risk free investments and earning only 8.5%. Hence we are making loss by paying more and earning less.

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