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

Question

Quizplus · Accepted Answer

If a project's NPV is less than zero, it means that the present value of its cash inflows is less than the present value of its cash outflows, so its IRR must be less than the WACC. This is because the WACC represents the cost of capital, so if the IRR is less than the WACC, the project is not generating a return greater than its cost of capital and is therefore not profitable. A project's NPV is calculated using the WACC, so statement A is incorrect. Statement C is also incorrect; if a project's NPV is greater than zero, it means that its cash inflows are greater than its cash outflows, so its IRR must be greater than the WACC. Statement D is incorrect because a low-risk project should have a lower WACC, not a higher one, which would make its NPV higher.

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