Question

In: Accounting

Should a project be accepted if it offers an annual after-tax cash flow of $1,250,000 indefinitely, costs $10 million, is riskier than the firm's average projects, and the firm uses a 12.5% WACC?

Should a project be accepted if it offers an annual after-tax cash flow of $1,250,000 indefinitely, costs $10 million, is riskier than the firm's average projects, and the firm uses a 12.5% WACC?

A. Yes, since NPV is positive.

B. Yes, since a zero NPV indicates marginal acceptability.

C. No, since NPV is zero.

D. No, since NPV is negative.

Solutions

Expert Solution

D. No, since NPV is negative.

 

NPV =

CF0 = -10 million

CF1 = 1.25 million/12.5%

NPV = -10+10 = 0

 

The 12.5% rate does not reflect the project's greater risk, so NPV is negative. Since the NPV is negative, a project should not be accepted.

The 12.5% rate does not reflect the project's greater risk, so NPV is negative. Since the NPV is negative, a project should not be accepted.

 


D. No, since NPV is negative.

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