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.
Renze Joy Candido answered 3 years agoRelated Solutions
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