Assume a new project requires an initial investment of $10 million dollars, with ensuing cash flows...

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Finance

Assume a new project requires an initial investment of $10million dollars, with ensuing cash flows of $2, $4 and $5 millionin years 1, 2 and 3. Assuming the company's WACC is 10%, which ofthe following statements is true?
The firm should reject the project, as the IRR is lower than theWACC.
The firm should accept the project, as the IRR is higher thanthe 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.

Answer & Explanation Solved by verified expert

4.4 Ratings (706 Votes)

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.

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Transcribed Image Text

Assume a new project requires an initial investment of $10million dollars, with ensuing cash flows of $2, $4 and $5 millionin years 1, 2 and 3. Assuming the company's WACC is 10%, which ofthe following statements is true?The firm should reject the project, as the IRR is lower than theWACC.The firm should accept the project, as the IRR is higher thanthe 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.