Question

Describe the decision rules for NPV and IRR. How do changes in the WACC affect the outcome of these decisions? (There are 4 parts to this question. 1-2 sentences each) NPV decision rule: Impact of changes in WACC on NPV rule: IRR decision rule: Impact of changes in WACC on IRR rule:

Answer 1

1. The decision rule for  NPV is accept the project if the NPV is positive and reject the if the NPV is negative. when comparision between two projects consider the project with highest positive NPV . Npv is equals to zero means projects generates cash inflow is equal to the cash outflow.

2.Impact of WACC ; WACC is the rate used by a firm in NPV to discount the cash flows. Npv and WACC are inversely related to each. If the higher the WACC lower the NPV and lower the WACC and higher the NPV

3. The decision rule for IRR is accept the project if the IRR is more than the project cost of capital and reject the project if the IRR is less than the project cost of capital.

4. In this acse also IRR is inversely related to cost of capital . if the cost of capital WACC) is goes up .projects rate of return will not exceed its cost hence lRR goes down. and IF WACC is goes down the iRR of the project will goes up.

both are inversely related .