Question

You are being asked to consider selling one of your regional divisions to a private equity company. The private equity company has just offered you $1.2 million for the regional division. The division is expected to provide your company net annual cash flows of $175,000 for each of the next 10 years without you having to make any additional investments in the division. Your team has calculated information to help you make your decision, as follows.
A) Your company's WACC is 7.9%
B) Your hurdle rate for this potential sale is 11.2%
C) The Net Present Value of this opportunity to your company using WACC as your discount rate is (-$20,420.78)
D) The likely Net Present Value of the division to the private equity company following the sale is $13,776.23
Which of the following answers is correct given the information provided above?
1) The IRR of the project to your company is between 7.9% and 11.2%
2) The hurdle rate for the private equity company is higher than the hurdle rate for your company
3) The IRR of the project to your company is below 7.9%
4) None of the Above

Answer 1

Answer:

3) The IRR of the project to your company is below 7.9%

Explanation:

As we can see in the question that at 7.9% wacc, the net present value is -$20,420.78

Since the net present value is in negative that shows that the internal rate of return would be less than 7.9%

So according to the given situation, the option 3 is correct

And, the same is to be considered