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. Question 5 options: 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. The lower the WACC used to calculate it, the lower the calculated NPV will be. If a project’s NPV is less 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 a relatively low-risk project should be found using a relatively high WACC.

Explanation / Answer

Correct option is If a project’s NPV is less than zero, then its IRR must be less than the WACC.

Internal rate of return is the implied rate from the project. It is the rate, at which NPV will be ZERO. If the IRR is less than WACC, NPV will be negative. If the IRR is greater than WACC, NPV will be positive.

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