Question

An NPV of $100K means:

The project has $100K in revenue

The project's alpha < WACC

The project's WACC < the project's IRR

The project is expected to have $100K in revenue

Answer 1

NPV is the difference between the present value of the cash inflows less present value of cash outflows discounted at WACC.

IRR is the rate of return at which if the cash flows are discounted, the NPV of the project becomes zero.

Since NPV of the project is $100,000 i.e. positive when discounted at WACC.

Also, higher the discount rate, lower will be the present value of future cash flows.

Therefore higher discount rate than WACC is required to make the NPV of the project with zero.

Hence the project IRR will be higher than the project's WACC.

Thus third option is correct.