The future cash flows of a stand-alone capital project are: If the firm's cost of capital is 12%, which of the following statements is true?

Question

The future cash flows of a stand-alone capital project are:  If the firm's cost of capital is 12%, which of the following statements is true?

Quizplus · Accepted Answer

To calculate the NPV, we discount each cash flow using the cost of capital of 12% and sum them up. The NPV is positive when the present value of cash inflows is greater than the present value of cash outflows. In this case, the NPV is positive at a discount rate of 12%, indicating that the project has value for the firm.

To determine the internal rate of return (IRR), we calculate the discount rate that makes the NPV equal to zero. Using the cash flows provided, we find that the IRR is approximately 18.5%.

Therefore, statement C is true, as the NPV is > $0 and the IRR is approximately 18.5%.

The Future Cash Flows of a Stand-Alone Capital Project Are