Answer 1 points 1 points a. The NPV of a relatively low-risk project should be f
ID: 2665552 • Letter: A
Question
Answer
a. The NPV of a relatively low-risk project should be found using a relatively high WACC. b. A project’s NPV is found by compounding the cash inflows at the IRR to find the terminal value (TV), then discounting the TV at the WACC. c. The lower the WACC used to calculate it, the lower the calculated NPV will be. d. If a project’s NPV is greater than zero, then its IRR must be less than zero. e. If a project’s NPV is less than zero, then its IRR must be less than the WACC.Explanation / Answer
1) ANSWER - OPTION e. If a project’s NPV is less than zero, then its IRR must be less than the WACC. 2) ANSWER OPTION d. One defect of the IRR method is that it assumes that the cash flows to be received from a project can be reinvested at the IRR itself, and that assumption is often not valid. 3) ANSWER OPTION d. The regular payback does not consider cash flows beyond the payback year, but the discounted payback overcomes this defect.