FM is contemplating an average-risk investment costing $100 million and promising an annual after-tax cash flow of $15 million in perpetuity.Which of the following statements is/are correct?
I.FM should reject the project because the IRR is greater than the firm's WACC.
II.FM should accept the project because the IRR is greater than the firm's WACC.
III.FM should accept the project because the NPV is greater than zero.
IV.FM should reject the project because the NPV is less than zero.
A) I only
B) II only
C) IV only
D) I and IV only
E) II and III only
F) None of the above.

Question

Quizplus · Accepted Answer

I. This statement is incorrect because if the IRR is greater than the firm's WACC, it means that the project is generating more return than the cost of capital, which is a desirable outcome. Therefore, FM should accept the project.

II. This statement is correct because as mentioned earlier, if the IRR is greater than the firm's WACC, it represents a desirable outcome, and FM should accept the project.

III. This statement is correct because if the NPV is greater than zero, it means that the project's cash inflows exceed its cash outflows, and the project is profitable. Therefore, FM should accept the project.

IV. This statement is incorrect because if the NPV is less than zero, it means that the project's cash outflows exceed its cash inflows. Therefore, the project is unprofitable, and FM should reject it.

Overall, the correct statements are II and III. Therefore, the best choice is E.

FM Is Contemplating an Average-Risk Investment Costing $100 Million and Promising