You are on the staff of Camden Inc. The CFO believes project
acceptance should be based on the NPV, but Steve Camden, the
president, insists that no project should be accepted unless its
IRR exceeds the project’s risk-adjusted WACC. Now you must make a
recommendation on a project that has a cost of $15,000 and two cash
flows: $110,000 at the end of Year 1 and -$100,000 at the end of
Year 2. The president and the CFO both agree that the appropriate
WACC for this project is 10%. At 10%, the NPV is $2,355.37, but you
find two IRRs, one at 6.33% and one at 527.01%, and a MIRR of
11.32%. Which of the following statements best describes your
optimal recommendation, i.e., the analysis and recommendation that
is best for the company and least likely to get you in trouble with
either the CFO or the president?
Group of answer choices
You should recommend that the project be rejected because (1)
its NPV is positive and (2) it has two IRRs, one of which is less
than the WACC, which indicates that the firm’s value will decline
if the project is accepted.
You should recommend that the project be rejected because,
although its NPV is positive, it has an IRR that is less than the
WACC.
You should recommend that the project be rejected because its
NPV is negative and its IRR is less than the WACC.
You should recommend that the project be rejected because,
although its NPV is positive, its MIRR is less than the WACC, and
that indicates that the firm’s value will decline if it is
accepted.
You should recommend that the project be accepted because (1)
its NPV is positive and (2) although it has two IRRs, in this case
it would be better to focus on the MIRR, which exceeds the WACC.
You should explain this to the president and tell him that that the
firm’s value will increase if the project is accepted.