Question

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

	a.	The NPVs of relatively risky projects should be found using relatively low costs of capital.
	b.	If a project's NPV is greater than zero, then its IRR must be less than the cost of capital.
	c.	The higher the cost of capital 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 cost of capital to find the terminal value (TV), then discounting the TV at the IRR to find its PV.
	e.	If a project's NPV is greater than zero, then its IRR must be less than zero.

Answer 1

the statement a) is incorrect because for risky projects , a higher cost of capital should be used

statement b) is incorrect because in case of normal cash flow and independent projects, if a project's NPV is greater than 0 , then its IRR must be greater than the cost of capital and not lower than cost of capital

statement c is CORRECT because we discount the cash flows by the cost of capital , this means that higher the cost of capital lower will be the vaue of cash flows and hence lower will be the NPV

Statement d) is incorrect because we discount the cash flows and not compound

statement e) is incorrect because when project NPV >0 , then its IRR must be greater than 0 , since the cash flow is normal.

hence the the correct option is c)