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.

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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).

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