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 NPV is found by compounding the cash inflows at the IRR to find the terminal value (TV),then discounting the TV at the WACC.
B) The lower the WACC used to calculate it,the lower the calculated NPV will be.
C) If a project's NPV is less than zero,then its IRR must be less than the WACC.
D) If a project's NPV is greater than zero,then its IRR must be less than zero.
E) The NPV of a relatively low-risk project should be found using a relatively high WACC.

Question

Quizplus · Accepted Answer

If a project's NPV is less than zero, it means that the discounted cash outflows exceed the discounted cash inflows, indicating a negative return. The WACC represents the opportunity cost of capital and should be the minimum required rate of return for investors. Therefore, if a project's IRR is less than the WACC, it would not generate returns higher than the required minimum and would have a negative NPV. On the other hand, if the IRR is higher than the WACC, the project would generate returns higher than the required minimum and would have a positive NPV. Option A is wrong because NPV is found by discounting all cash flows, not just the TV. Option B is incorrect because a lower WACC would increase the present value of cash flows and result in a higher NPV. Option D is incorrect because a project's IRR represents the discount rate that makes NPV equal to zero, so if NPV is positive, the IRR must be higher than the WACC. Option E is incorrect because a lower WACC would increase the present value of cash flows and result in a higher NPV, regardless of the project's risk level.

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