Question

Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.

A: The NPV of a relatively low-risk project should be found using a relatively high WACC

B: The lower the WACC used to calculate it, the lower the calculated NPV will be If a project’s NPV is greater than zero, then its IRR must be less than zero

C: If a project’s NPV is less than zero, then its IRR must be less than the WACC

D: A project’s NPV is found by compounding the cash inflows at the IRR to find the terminal value (TV), then discounting the TV at the WACC

Answer #1

Option | Option Name | Correct/Incorrect | Reason |

A |
The NPV of a relatively low-risk project should be found using a relatively high WACC |
Incorrect | For low risk project, low WACC should be used |

B | The lower the WACC used to calculate it, the lower the calculated NPV will be If a project’s NPV is greater than zero, then its IRR must be less than zero | Incorrect | Lower WACC leads to higher NPV due to less discounting effect. If NPV is greater than 0 than IRR is more than WACC |

C | If a project’s NPV is less than zero, then its IRR must be less than the WACC | Correct | If NPV is less than 0 than IRR is less than WACC |

D | A project’s NPV is found by compounding the cash inflows at the IRR to find the terminal value (TV), then discounting the TV at the WACC | Incorrect | Incorrect option |

**Hope you understand the solution.**

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