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.

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 initial investment, which indicates that the project is not generating enough return to cover the cost of capital. Therefore, the IRR, which represents the rate of return generated by the project, must be less than the WACC, which represents the cost of capital. The other statements are incorrect. The lower the WACC, the higher the calculated NPV will be (not lower). If a project's NPV is greater than zero, it means that the project is generating enough return to cover the cost of capital, so its IRR must be greater than the WACC (not less than zero). The WACC used to calculate a project's NPV should reflect the riskiness of its cash flows, so a relatively low-risk project should be discounted at a relatively low WACC (not a high WACC). The formula to find a project's NPV is to discount its cash inflows at the WACC, not to compound them at the IRR and then discount the terminal value.

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