CFt is the expected cash flow at Time t, r is the project\'s risk-adjusted cost

Question

CFt is the expected cash flow at Time t, r is the project's risk-adjusted cost of capital, and N is its life, and cash outflows are treated as negative cash flows. The NPV calculation assumes that cash inflows can be reinvested at the project's risk-adjusted (rd/rs/WACC/). When the firm is considering independent projects, if the project's NPV exceeds zero the firm should (accept/reject) the project. When the firm is considering mutually exclusive projects, the firm should accept the project with the (lowest positive/lowest negative/highest positive/highest negative) NPV.

Explanation / Answer

1. The NPV calculation assumes that cash inflows can be reinvested at the projects's risk adjusted WACC. (IRR assumes reinvestment of cash flow at IRR itself).

2. When the firm is considering independent projects, if the project's NPV exceeds zero, the firm should accept the project.

3. When the firm is considering mutually exclusive projects, the firm should accept the project with the highest positive NPV.

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