Question

A project will generate $1 million net cash flow annually in perpetuity. If the project costs $7 million, what is the lowest WACC shown below that will make the NPV negative?

A. 10%

B. 12%

C. 14%

D. 16%

Answer 1

A project will generate $1 million net cash flow annually in perpetuity. If the project costs $7 million, what is the lowest WACC shown below that will make the NPV negative?

D. 16%

 

$1 million/.16 = $6.25 million < $7 million

Therefore, NPV < $0

At 14%, the NPV is still positive by $142,857.

The lowest WACC is 16%.