Question

Tom just got out of a meeting with felicity in which they discussed a capital budgeting project they are evaluating for the company. Tom's mind was not focused on the meeting, so all he can remember is that Felicity used one of the time value of money techniques mentioned in the book to evaluate the project and that she concluded the project should be purchase. based on this information, which of the following statements must be correct?

A. The projected net present value (NPV) is negative, that is NPV<0.

B. The project's discount payback period (DPB) is greater than its expected life (n); that is DPB > n.

C. The project's internal rate of return (IRR) is greater than the firm's weighted average cost of capital (WACC); that is IRR>WACC.

D.The project traditional PB payback period must be greater than DPB; PB>DPB

Answer 1

The correct option is C. The project's internal rate of return (IRR) is greater than the firm's weighted average cost of capital (WACC); that is IRR>WACC. This is because a project creates value if its IRR is higher than the required return.

A is incorrect. A project with negative NPV is not acceptable because it does not create value

B is incorrect. DPB should be less than n, for a project to be acceptable

D is incorrect. This relation does not define an accept/reject decision