**Question:**Which of the following statements is correct? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.1. The lower the WACC used to calculate a project's NPV, the lower the calculated NPV will be.2. If a project's NPV is less than zero, then its IRR must be less than the WACC.3. If a project's NPV is greater than zero, then its IRR must be less than zero.4. The NPV of a relatively low-risk project should be found using a relatively high WACC.5. A project’s NPV is found by compounding the cash inflows at the IRR to find the terminal value (TV), then discounting the TV at the WACC.

NPV of a project is calculated by discounting the cash flows & subtracting the amount from the initial investment. Similarly IRR of a project is nothing but when the NPV is made to 0. But IRR is calculated on trail & error basis.When the WACC of a project is less, the value of NPV will generally be on the higher side. Hence option a is not correct. When the NPV of a project is less than 0 or in case of a negative NPV, this means that the discount rate which is the cost of capital would be more than the IRR & also of course with negative NPV. in such cases the project would not be accepted. When the NPV of a project is greater than 0, then the value of NPV will always be positive & the project would be accepted & the IRR will also be on a positive side. Hence option c is also incorrect. High risk projects are calculated with high cost of capital or WACC & the reverse would be true for low risk projects. Hence option d is also not correct. NPV of a project is calculated by discounting the cash flows at the given cost of capital & the same is added to arrive at the sum from which the initial investment is reduced. Hence from the given options, option b is the correct answer i.e. when the project NPV is less than 0, then the IRR would be less than the WACC.

Answered: ninal | bartleby

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

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