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.