Question

A firm may accept a project even if the acceptance would cause an increase in the firm’s cost of capital. T/F

Answer 1

True, the acceptance of the project is purely based on the NPV of cash flows.

if NPV > 0 ---- accept the project

if NPV < 0 ---- Reject the project

all the projects that add to the NPV of the firm should be accepted and those which reduce the NPV of the form should be rejected. In this case even though the WACC of the firm is increasing due to the project, the final deceison has to be based on the calculation of the net NPV of the firm if it takes on the project. It can also depend on the capital structure that the firm presently has and its target capital structure.