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 ago
Next > < Previous

Related Solutions

Assume a new project requires an initial investment of $10 million dollars, with ensuing cash flows...
Assume a new project requires an initial investment of $10 million dollars, with ensuing cash flows of $2, $4 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 reject the project, as the IRR is lower than the WACC. b. The firm should accept the project, as the IRR is higher than the WACC. c. The firm should accept the project, as the...
Assume a new project requires an initial investment of $10 million dollars, with ensuing cash flows...
Assume a new project requires an initial investment of $10 million dollars, with ensuing cash flows of $2, $4 and $5 million in years 1, 2 and 3. Assuming the company's WACC is 10%, which of the following statements is true? The firm should reject the project, as the IRR is lower than the WACC. The firm should accept the project, as the IRR is higher than the WACC. The firm should accept the project, as the NPV is positive....
Assume a new project requires an initial investment of $10 million dollars, with ensuing cash flows...
Assume a new project requires an initial investment of $10 million dollars, with ensuing cash flows of $2, $4 and $5 million in years 1, 2 and 3. Assuming the company's WACC is 10%, which of the following statements is true? The firm should reject the project, as the IRR is lower than the WACC. The firm should accept the project, as the IRR is higher than the WACC. The firm should accept the project, as the NPV is positive....
Lincoln Inc. is considering a new project which requires an initial investment of $6 million today....
Lincoln Inc. is considering a new project which requires an initial investment of $6 million today. The investment involves the purchase of a machine with a CCA rate of 30%. Revenues less expenses for this project are expected to be $2 million per year for 4 years. The project requires an immediate $200,000 increase in net working capital and the working capital will grow at 3% each year in the following years. Lincoln Inc. expects to sell the machine at...
+Consider a Project that requires an initial investment of 2000 and generates cash flows of 200,...
+Consider a Project that requires an initial investment of 2000 and generates cash flows of 200, 600, 800 and 1200 in years 1 through 4. Use a discount rate of 10% Compute the Payback period (in years) for the project +Consider a Project that requires an initial investment of 2000 and generates cash flows of 200, 600, 800 and 1200 in years 1 through 4. Use a discount rate of 10% Compute the discounted payback period (in years) for the...
A project requires an initial investment of $1.2 million. It expects to generate a perpetual cash...
A project requires an initial investment of $1.2 million. It expects to generate a perpetual cash flow. The first year cash flow is expected at $100,000. The cash flows are then expected to grow at 1.25% forever. If the cost of capital for this project is 11%, what is the project's NPV? Group of answer choices -$0.480 million $0.265 million $7,177 million -$0.174 million -$0.265 million $0.174 million
A project requires an initial investment of $1.2 million. It expects to generate a perpetual cash...
A project requires an initial investment of $1.2 million. It expects to generate a perpetual cash flow. The first year cash flow is expected at $100,000. The cash flows are then expected to grow at 1.25% forever. The appropriate cost of capital for this project is 11%. What is the project's IRR and should it be accepted based on the IRR rule? Group of answer choices IRR is 9.6%; project should not be accepted IRR is 9.6%; project should be...
1).A project requires an initial investment of $973,000. The projects generates cash flows of $250,000 in...
1).A project requires an initial investment of $973,000. The projects generates cash flows of $250,000 in year 1, $300,000 in year 2, $300,000 in year 3, $400,000 in year 4 and $400,000 in year 5. If the required rate of return for the project is 12 percent, the payback period is ____________ and the discounted payback period is _______________. A).3.7 years; 4.5 years B).2.8 years; 3.9 years C). 2.8 years; 4.2 years D).3.3 years; 3.9 years E).3.3 years; 4.2 years...
Project E requires an initial investment of $100,000 and the produces annual cash flows of $42,000...
Project E requires an initial investment of $100,000 and the produces annual cash flows of $42,000 per year for each of the next 3 years. Project L also requires an initial investment of $100,000 and produces cash flows of $35000 in year 1, $45,000 in year 2, and $75,000 in year 3. If the discount rate is 15% and the projects are mutually exclusive. a) Project L should be chosen b) Neither project is chosen c) Project E should be...
A project requires an investment of $330 million and has expected annual cash flows of $27...
A project requires an investment of $330 million and has expected annual cash flows of $27 million in perpetuity, starting in one year. In fact, future cash flows will be either $78 million or $16 million, in perpetuity. The company can end the project in 1 year after collecting the first cash flow and thus finding out the amount of future cash flows, and then sell all project assets for $330 million (after taxes). The appropriate discount rate for the...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT