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. 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 WACC.b. The lower the WACC used to calculate it, the lower the calculated NPV will be.c. If a project's NPV is less than zero, then its IRR must be less than the WACC. d. If a project's NPV is greater than zero, then its IRR must be less than zero. e. The NPV of a relatively low-risk project should be found using a relatively high WACC.

Answer 1

Answer:

b. The lower the WACC used to calculate it, the lower the calculated NPV will be

Explanation:

When calculating NPV the cash inflows and cash outflows arising at the duration of the life are discounted at WACC. Generally, present value of outflow is same as actual as no discounting is done, as that occurs at the initial time of the project.

Cash inflows arising at year end are discounted.

When, WACC is lower The present value of inflows is lower in comparison to higher WACC.

Therefore, there is lower NPV with lower WACC.

Thus, Statement b. is correct.

b. The lower the WACC used to calculate it, the lower the calculated NPV will be