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Assume a new project requires an initial investment of $6 million dollars, with ensuing cash flows...

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Finance

Assume a new project requires an initial investment of $6million dollars, with ensuing cash flows of $1, $3 and $5 millionin years 1, 2 and 3. Assuming the company's WACC is 10%, which ofthe following statements is true?

a.) The firm should accept the project, as the IRR is lower thanthe WACC.

b.) The firm should reject the project, as the IRR is higherthan the WACC.

c.) The firm should accept the project, as the NPV ispositive.

d.) The firm should reject the project, as the NPV isnegative.

e.) None of these statements are true.

Answer & Explanation Solved by verified expert
4.1 Ratings (738 Votes)

c.) The firm should accept the project, as the NPV is positive.

NPV = 1.15 from the table below

Discount rate 10.0000%
Cash flows Year Discounted CF= cash flows/(1+rate)^year Cumulative cash flow
                     (6.000) 0                                     (6.00)                                  (6.00)
                        1.000 1                                        0.91                                  (5.09)
                        3.000 2                                        2.48                                (2.612)
                        5.000 3                                        3.76                                  1.145

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Transcribed Image Text

Assume a new project requires an initial investment of $6million dollars, with ensuing cash flows of $1, $3 and $5 millionin years 1, 2 and 3. Assuming the company's WACC is 10%, which ofthe following statements is true?a.) The firm should accept the project, as the IRR is lower thanthe WACC.b.) The firm should reject the project, as the IRR is higherthan the WACC.c.) The firm should accept the project, as the NPV ispositive.d.) The firm should reject the project, as the NPV isnegative.e.) None of these statements are true.

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