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.
A) A project's regular IRR is found by compounding the initial cost at the WACC to find the terminal value (TV), then discounting the TV at the WACC.
B) A project's regular IRR is found by compounding the cash inflows at the WACC to find the present value (PV), then discounting the TV to find the IRR.
C) If a project's IRR is smaller than the WACC, then its NPV will be positive.
D) A project's IRR is the discount rate that causes the PV of the inflows to equal the project's cost.

Question

Quizplus · Accepted Answer

The IRR is the discount rate that makes the NPV of the project equal to zero, so statement D is correct. Statement A is incorrect because the terminal value should be discounted back to the present time, not at the WACC. Statement B is incorrect because the cash inflows should be discounted back to the present time to find the PV, not compounded. Statement C is incorrect because if the IRR is smaller than the WACC, then the project's NPV will be negative, not positive.

Which of the Following Statements Is CORRECT? Assume That the Project