Which of the following statements is correct? Assume that all projects being considered have normal cash flows and are equally risky.
A) If a project's IRR is equal to its WACC, then, under all reasonable conditions, the project's NPV must be negative.
B) If a project's IRR is equal to its WACC, then, under all reasonable conditions, the project's IRR must be negative.
C) If a project's IRR is equal to its WACC, then, under all reasonable conditions, the project's NPV must be zero.
D) There is no necessary relationship between a project's IRR, its WACC, and its NPV.

Question

Quizplus · Accepted Answer

When a project's IRR is equal to its WACC, it means that the project is earning exactly what it should be earning based on its risk. Thus, the project's NPV should be zero, as the cash inflows would be equal to the initial investment. If the NPV was negative, it would mean that the project is not generating enough cash inflows to cover the costs and compensate investors for the risk they are taking on. Similarly, if the IRR was negative, it would mean that the project is not generating a sufficient return to compensate investors for the risk they are taking on. Therefore, option C is the correct answer.

Which of the Following Statements Is Correct? Assume That All