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.
A)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.
B)The lower the WACC used to calculate a project's NPV, the lower the calculated NPV will be.
C)If a project's NPV is less than zero, then its IRR must be less than the WACC.
D)If a project's NPV is greater than zero, then its IRR must be less than zero.
E)The NPV of a relatively low-risk project should be found using a relatively high WACC.

Question

Quizplus · Accepted Answer

The statement in option C is correct according to the concept of NPV and IRR. A project with a negative NPV means that the discounted cash outflows exceed the discounted cash inflows. This implies that the cost of capital or the WACC used to discount the cash flows is higher than the IRR of the project. Therefore, option C is the correct statement. Option A is incorrect because the correct method is to discount the cash flows at the WACC and not to compound the cash inflows at the IRR. Option B is incorrect because a lower WACC will increase the NPV, all else being equal. Option D is incorrect because if the NPV is positive, the project's IRR must be higher than the WACC. Option E is incorrect because higher risks should be associated with higher WACC, not lower WACC.

Which of the Following Statements Is CORRECT? Assume That the Project