Question

If you assume that a project being considered has normal cash flows, with one outflow followed by a series of inflows, which statement would be correct? Question 11 options:

a) The lower the cost of capital used to calculate a project's NPV, the lower the calculated NPV will be.

b) If a project's NPV is less than zero, then its IRR must be less than the cost of capital.

c) A project’s NPV is found by compounding the cash inflows at the IRR to find the terminal value (TV), then discounting the TV at the cost of capital.

d) The NPV of a relatively low-risk project should be found using relatively high cost of capital.

Answer 1

Answer = b. If a project NPV is less than zero, then its IRR must be less than the cost of capital as because NPV represent the net of Inflow after deducting the outflow. IRR is the point when inflow is equal to outflow.If the Inflow is lower then we will have negative npv which will be less then cpst of capital.

Option A is incorrect as because cost of capital represents the expection of the investors. If an investors expect lower higher will be the NPV.

Option C is incorrect as because Project npv is calculating by discounting the inflows at cost of capital

Option D is incorrect as because low risk project have lower returns and hence cost of capital will also be lower.