A project has an up-front cost of $1,000,000. The project’s cost of capital is 1

Question

A project has an up-front cost of $1,000,000. The project’s cost of capital is 12 percent and its net present value is $10. Which of the following statements is not true?

The project should be rejected since its NPV of $10 is so small relative to the project cost.

The project’s internal rate of return is greater than 12 percent, its cost of capital.

The project should be accepted since it has a positive NPV, however small it is.

Accepting the project will increase the firm value of the company.

The project should be rejected since its NPV of $10 is so small relative to the project cost.

The project’s internal rate of return is greater than 12 percent, its cost of capital.

The project should be accepted since it has a positive NPV, however small it is.

Accepting the project will increase the firm value of the company.

Explanation / Answer

Accepting rule under NPV:

A company can accept a project, if it has positive NPV. Only projects with negative NPV only will be rejected. Here, project has positive NPV i.e. $10, so it should be accepted.

Hence, correct option is The project should be rejected since its NPV of $10 is so small relative to the project cost.

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