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In: Finance

Assume a new project requires an initial investment of $6 million dollars, with ensuing cash flows...

Assume a new project requires an initial investment of $6 million dollars, with ensuing cash flows of $1, $3 and $5 million in years 1, 2 and 3. Assuming the company's WACC is 10%, which of the following statements is true?

a.) The firm should accept the project, as the IRR is lower than the WACC.

b.) The firm should reject the project, as the IRR is higher than the WACC.

c.) The firm should accept the project, as the NPV is positive.

d.) The firm should reject the project, as the NPV is negative.

e.) None of these statements are true.

Solutions

Expert Solution

c.) The firm should accept the project, as the NPV is positive.

NPV = 1.15 from the table below

Discount rate 10.0000%
Cash flows Year Discounted CF= cash flows/(1+rate)^year Cumulative cash flow
                     (6.000) 0                                     (6.00)                                  (6.00)
                        1.000 1                                        0.91                                  (5.09)
                        3.000 2                                        2.48                                (2.612)
                        5.000 3                                        3.76                                  1.145

jeff jeffy answered 5 months ago
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