Question

Question 3 5 pts Our firm's cost of capital is 10%. We are thinking about taking a project that gives a 10% rate of return. Which of the following statements are correct. The NPV of this project is zero. The firm will increase its value if it takes this project. The firm should not take this project because it will lose value if the project is taken. The IRR of the project is greater than the cost of capital. Two of the statements are correct. Question 4 5 pts Which of the following evaluation approaches can be used if we are analyzing two nonconventional (nonnormal) independent projects? All of the approaches listed can be used Only the internal rate of return (IRR) Only the profitability index (PI) Only the net present value (NPV) 0 Two of the approaches listed can be used

Answer 1

3) The NPV of this project is zero

If the rate of return equal the cost of capital, the NPV equals zero since all the cash flows increase at 10% while at the same time they are discounted at 10% to get the NPV which would equal 0. Due to this the firm won't increase any value. The firm would not lose or gain from this project. Nothing can be said about the IRR.

4) Only the net present value

Non-conventional project would give multiple IRR problem. Also, the profitability index method cannot be used as it required initial investment whereas in this case there are multiple investments between periods.