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?  Please explain.  Several sentences are sufficient.

Homework Answers

Answer #1

Yes, the NPV of the project will be negative.

The reason for negative NPV is that the firm's Yield or internal rate of return (IRR) is less than its WACC or cost of capital.

Internal rate of return (IRR) or yield here is the return that will be generated from the cash flows of the investment. It is their reinvestment rate. On the other hand,m WACC denotes the cost of capital or cost of the funds invested. When the cost is more than the return then the project will give negative net present value (NPV).

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
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...
A firm is considering investing in a 15-year capital budgeting project with a net investment of...
A firm is considering investing in a 15-year capital budgeting project with a net investment of $14 million. The project is expected to generate annual net cash flows each year of $2 million and a terminal value at the end of the project of $10 million. The firm’s cost of capital is 9 percent and marginal tax rate is 40%. What is the profitability index of this investment? 0.35 0.78 2.86 1.54 1.35
You work for a software developing firm and the firm is considering canceling all of their...
You work for a software developing firm and the firm is considering canceling all of their operating leases for the printers that are used throughout the firm and replace them with newly acquired printers at a cost of $10.0 million. The expected IRR from this $10 m investment is 8%/year and the firm’s WACC is 10%. What do you think is the expected NPV from this investment (positive, negative, zero, or not sure)? Explain!
A firm is considering a new project that will require an initial outlay of $20 million....
A firm is considering a new project that will require an initial outlay of $20 million. It has a target capital structure of 55% debt, 15% preferred stock, and 30% common equity.  The firm has non-callable bonds that mature in five years with a face value of $1,000, an annual coupon rate of 8%, and a market price of $1080.64.  The yield on the company’s current bonds is a good approximation of the yield on any new bonds that are issued.  The cost...
A firm is considering investing in a project that requires an initial investment of $200,000 and...
A firm is considering investing in a project that requires an initial investment of $200,000 and is expected to produce cash inflows of $60,000, $80,000, and $100,000 in first, second, and third years. There will be no residual value. The firm applies a discount rate of 10%. Discount factors for Year 1, 2 and 3 are 0.909, 0.826, and 0.751 respectively. Required: i) Calculate the NPV of the project. ii) Explain the meaning of NPV and its advantages as an...
A firm is considering investing in a project that requires an initial investment of $200,000 and...
A firm is considering investing in a project that requires an initial investment of $200,000 and is expected to produce cash inflows of $60,000, $80,000, and $100,000 in first, second, and third years. There will be no residual value. The firm applies a discount rate of 10%. Discount factors for Year 1, 2 and 3 are 0.909, 0.826, and 0.751 respectively. Required: i) Calculate the NPV of the project. ii) Explain the meaning of NPV and its advantages as an...
A firm is evaluating a four-year project that requires an investment today of $2.6 million. In...
A firm is evaluating a four-year project that requires an investment today of $2.6 million. In addition, the project will require a one-time injection of working capital of $222,000 today that will be recovered at project end. The project is estimated to provide operating cash flows of $615,000 each year for the four years. The firm’s discount rate is 8.5%. What is the NPV of the project?
1 - Firm UVW has a face debt value of $70 Million USDs trading at 95%...
1 - Firm UVW has a face debt value of $70 Million USDs trading at 95% with a pre-tax weighted cost of 9%. Firm UVW's common equity for the year was valued at $100 Million of USDs and preferred equity for $15 Million of USDs. The Preferred equity rate was calculated to be 20%. However, the common equity was to be calculated using CAPM approach, with a 3.5% risk free rate and a 15% market risk premium rate, assuming a...
A firm is considering an investment opportunity today. The initial cash flow (year 0) will be...
A firm is considering an investment opportunity today. The initial cash flow (year 0) will be an investment of $50 million. The project is expected to generate a project cash flow of $5 million for year 1, and the firm expects project cash flows to increase by 4% per year over the life of the project. The project will run for 20 years, and the firm has a cost of capital of 11%. What is the NPV of this proposed...
A firm is considering an investment opportunity today. The initial cash flow (year 0) will be...
A firm is considering an investment opportunity today. The initial cash flow (year 0) will be an investment of $50 million. The project is expected to generate a project cash flow of $6 million for year 1, and the firm expects project cash flows to increase by 4% per year over the life of the project. The project will run for 20 years, and the firm has a cost of capital of 12%. What is the NPV of this proposed...