Question

Which of the following statements is correct? Assume the project being considered has normal cash flows,...

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

 If a project’s NPV is > 0, the IRR must be less than WACC The higher the WACC used to calculate NPV, the lower the calculated NPV will be The NPV’s of relatively risky projects should be found using relatively low WACC’s If a project’s NPV is > 0, the IRR must be less than zero.

Answer: The higher the WACC used to calculate NPV, the lower the calculated NPV will be

This is because the NPV is inversely proportional to discount rate used for cash flow discounting. Higher the discount rate, lower would the NPV be.

If a project’s NPV is > 0, the IRR must be less than WACC. This is false. When project's NPV > 0, IRR > WACC.

The NPV’s of relatively risky projects should be found using relatively low WACC’s. This is false. Riskier the project, higher should the WACC or discount rate be.

If a project’s NPV is > 0, the IRR must be less than zero.. False because when NPV > 0, IRR would be positive and higher than WACC

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