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.

Question

Quizplus · Accepted Answer

A project's NPV is the present value of its future cash flows, discounted at the appropriate discount rate (usually the WACC). If the NPV is less than zero, it means that the project's cash outflows exceed its discounted cash inflows, i.e. the project is not generating enough return to cover its cost of capital. In this scenario, the IRR would be less than the WACC. Option A is incorrect because it refers to a terminal value, which is not always relevant or applicable to a project's cash flows. Option B is incorrect because a lower WACC would increase the present value of a project's cash inflows, thus increasing its NPV. Option D is incorrect because if a project's NPV is positive, it means that its cash inflows exceed its outflows, and therefore the IRR would be greater than the WACC.

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