Asked by Juliet Sebastian on May 10, 2024
Verified
Which statement about a project's IRR is correct? Assume that all projects being considered have normal cash flows and are equally risky.
A) If a project's IRR is equal to its WACC, then, under all reasonable conditions, the project's NPV must be negative.
B) If a project's IRR is equal to its WACC, then, under all reasonable conditions, the project's IRR must be negative.
C) If a project's IRR is equal to its WACC, then, under all reasonable conditions, the project's NPV must be zero.
D) There is no necessary relationship between a project's IRR, its WACC, and its NPV.
WACC
Weighted Average Cost of Capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is proportionately weighted.
NPV
Net Present Value is a financial metric that calculates the present value of an investment's expected cash flows minus the initial investment.
IRR
Internal Rate of Return; the discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero.
- Comprehend the principle of Net Present Value (NPV) and its association with the cost of capital.
- Understand the concept of Internal Rate of Return (IRR) and its application in evaluating projects.
Verified Answer
BN
Brittney NicholeMay 15, 2024
Final Answer :
C
Explanation :
If a project's Internal Rate of Return (IRR) is equal to its Weighted Average Cost of Capital (WACC), the Net Present Value (NPV) of the project is zero. This is because the IRR is the discount rate that makes the NPV of all cash flows from a particular project equal to zero.
Learning Objectives
- Comprehend the principle of Net Present Value (NPV) and its association with the cost of capital.
- Understand the concept of Internal Rate of Return (IRR) and its application in evaluating projects.