Question

You work for a software developing firm and the firm is considering canceling all of their...

You work for a software developing firm and the firm is considering canceling all of their operating leases for the printers that are used throughout the firm and replace them with newly acquired printers at a cost of $10.0 million. The expected IRR from this $10 m investment is 8%/year and the firm’s WACC is 10%.

What do you think is the expected NPV from this investment (positive, negative, zero, or not sure)? Explain!

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Answer #1

Expected NPV will be NEGATIVE

An IRR less than WACC means that present value of cash inflows discounted at WACC will be less than initial investment. This will result in a negative NPV as NPV is calculated by subtracting initial investment from present value of cash inflows. IRR makes initial investment equal to present value of cash inflows. A WACC greater than IRR will make present value of cash inflows lower than initial investment resulting in negative NPV.

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