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Assume a new project requires an initial investment of $6 million dollars, with ensuing cash flows...

Assume a new project requires an initial investment of $6 million dollars, with ensuing cash flows of $1, $3 and $5 million in years 1, 2 and 3. Assuming the company's WACC is 10%, which of the following statements is true?

The firm should accept the project, as the IRR is lower than the WACC.

The firm should reject the project, as the IRR is higher than the WACC.

The firm should accept the project, as the NPV is positive.

The firm should reject the project, as the NPV is negative.

None of these statements are true.

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Answer #1

NPV = Present value of cash inflows - present value of cash outflows

NPV = -6 + 1 / (1 + 0.1)1 + 3 / (1 + 0.1)2 + 5 / (1 + 0.1)3

NPV = 1.15 million

No need to calculate IRR as a project having positive NPV will have IRR greater than WACC

The firm should accept the project, as the NPV is positive.

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