Unitron Corp.is considering project Z,which costs $50 million and offers an annual after-tax cash flow of $7.5 million in perpetuity.The project is in an industry that has greater market risk than Unitron's typical projects.Unitron's company weighted-average cost of capital,based on its typical projects,is 15%.Should Unitron Corp.accept project Z?
A) Yes,because the NPV of the project is positive.
B) Yes,because a zero-NPV project is marginally acceptable.
C) No,because a zero-NPV project is a waste of resources.
D) No,because the NPV of the project is negative.

Question

Quizplus · Accepted Answer

Use the equation for a perpetuity to solve for the IRR:
7)5/IRR = 50
IRR = 15%
Since the IRR is 15%,it would have an NPV of zero at a WACC of 15%.However,this project is riskier than the firm's average projects,so the WACC would be higher than 15%,which would make the NPV negative.