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If a project being considered has normal cash flows, with one outflow followed by a series...

If a project being considered has normal cash flows, with one outflow followed by a series of inflows, which of the following statements is CORRECT?

A If a project's NPV is greater than zero, then its IRR must be less than the WACC.

B If a project's NPV is greater than zero, then its IRR must be less than zero.

C The higher the WACC used to calculate the NPV, the lower the calculated NPV will be.

D A project's NPV is generally found by compounding the cash inflows at the WACC to find the terminal value (TV), then discounting the TV at the IRR to find its PV.

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Answer #1

Answer - Option C. The higher the WACC used to calculate the NPV, the lower the calculated NPV will be.

Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time. Now, higher the WACC, which is the discount rate used to calculate the present value of the cash flows, lower would be the present value of future cash flows. This would lead to lower NPV.

Option a and b are incorrect. For NPV to be greater than 0, IRR should be higher than WACC and positive.

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