Which of the following statements is correct? Assume that the project being cons

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. Select one: 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. If a project’s NPV is greater than zero, then its IRR must be less than zero. c. If a project’s net present value (NPV) is less than zero, then its internal rate of return (IRR) must be less than the weighted average cost of capital (WACC). d. The lower the WACC used to calculate a project’s NPV, the lower the calculated NPV will be.

Explanation / Answer

The following statement is correct:

c. If a project’s net present value (NPV) is less than zero, then its internal rate of return (IRR) must be less than the weighted average cost of capital (WACC).

Since when IRR is lower than the WACC, the project becomes unfeasible. In that case, NPV will always be less than 0 i.e. negative NPV.

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