A project will generate $1 million net cash flow annually in perpetuity.If the project costs $7 million,what is the lowest WACC shown below that will make the NPV negative?

Question

Quizplus · Accepted Answer

To calculate the NPV, we need to discount the net cash flow by the weighted average cost of capital (WACC).

NPV = (Net cash flow / WACC)

So, NPV will be negative if the WACC is greater than the net cash flow divided by the investment cost.

i.e., WACC > (Net cash flow / Investment cost)

WACC > (1,000,000 / 7,000,000)

WACC > 0.143

Therefore, the lowest WACC that will make the NPV negative is 16% (Option D).

A Project Will Generate $1 Million Net Cash Flow Annually