Which of the following is CORRECT? Assume that the project being considered has
ID: 2773627 • Letter: W
Question
Which of the following is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.
A project's NPV is generally found by compounding the cash inflows at the WACC to find the terminal value (TV), then discounting the TV at the IRR to find its PV.
The higher the WACC used to calculate the NPV, the lower the calculated NPV will be.
If a project's NPV is greater than zero, then its IRR must be less than the WACC.
If a project's NPV is greater than zero, then its IRR must be less than zero.
The NPV of relatively risky projects should be found using relatively low WACCs.
a.A project's NPV is generally found by compounding the cash inflows at the WACC to find the terminal value (TV), then discounting the TV at the IRR to find its PV.
b.The higher the WACC used to calculate the NPV, the lower the calculated NPV will be.
c.If a project's NPV is greater 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 relatively risky projects should be found using relatively low WACCs.
Explanation / Answer
Following statements was correct.
The higher the WACC used to calculate the NPV, the lower the calculated NPV will be.
Discounted rates and present values have inverse relationship. if discount rate increase present value will decrease and vice-versa. If present value decrease NPV will also decrease
b.The higher the WACC used to calculate the NPV, the lower the calculated NPV will be.
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