Question
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 11 months agoRelated Solutions
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