A company considers a new project. The required rate of return (WACC) on the pro

Question

A company considers a new project. The required rate of return (WACC) on the project is 10 percent. Which of the following statement is correct?

A. If the project’s NPV = $1,500, the company should accept the project.

B. If the project’s IRR < 10 percent, the company should accept the project.                     

C. If the project’s MIRR < 10 percent, the company should accept the project.                  

D. If the project’s PI > 0, the company should accept the project.   

E. If the project’s payback period > required cutoff payback, the company should accept the project.                  

F. If the project’s NPV < 0 and IRR > 10 percent, the company should accept the project.

Explanation / Answer

A. If the project’s NPV = $1,500, the company should accept the project.- Correct, as NPV >0, company already achived its WACC

B. If the project’s IRR < 10 percent, the company should accept the project. - Incorrect. Company should at least earn min WACC

C. If the project’s MIRR < 10 percent, the company should accept the project. -Incorrect. Company should at least earn min WACC   

D. If the project’s PI > 0, the company should accept the project. - Incorrect. PI >1 for accepting project

E. If the project’s payback period > required cutoff payback, the company should accept the project. - Incorrect. Project should be completed within required cutoff. Delay in relasiation of payback affect project costs.

F. If the project’s NPV < 0 and IRR > 10 percent, the company should accept the project.- Incorrect. NPV<0 means absolute value of project is in negative though IRR>10%.

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