Question

In: Finance

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.

The firm should accept the project, as the NPV is negative.

None of these statements are true.

Solutions

Expert Solution

Statement showing Cash flows
Particulars Time PVf 10% Amount PV
Cash Outflows                            -                               1.00       (10,000,000.00) (10,000,000.00)
PV of Cash outflows = PVCO (10,000,000.00)
Cash inflows                       1.00                         0.9091           2,000,000.00        1,818,181.82
Cash inflows                       2.00                         0.8264           4,000,000.00        3,305,785.12
Cash inflows                       3.00                         0.7513           5,000,000.00        3,756,574.00
PV of Cash Inflows =PVCI        8,880,540.95
NPV= PVCI - PVCO      (1,119,459.05)
Since NPV is negative it means IRR is less than 10%
The firm should reject the project, as the IRR is lower than the WACC.

jeff jeffy answered 11 months ago
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