Question

​RiverRocks, Inc., is considering a project with the following projected free cash​ flows:

Year	0	1	2	3	4
Cash Flow ​(in millions)	−$50.7	$9.4	$20.5	$20.5	$15.5

The firm believes​ that, given the risk of this​ project, the WACC method is the appropriate approach to valuing the project.​ RiverRocks' WACC is 11.7%.

Should it take on this​ project? Why or why​ not?

Answer 1

If IRR > WACC, the rate of return of a project or investment exceeds its costs. Hence, the project should be accepted
If IRR < WACC, the rate of return of a project or investment won't exceed its costs. Hence, the project should not be accepted
Here, IRR refers to the internal rate of return and WACC is the weighted average cost of capital

AB Year Cash flow 0 -50.70 9.4 2 20.5 3 20.5 15.5 7 IRR= 10.66% 8 Formula used: IRR(B2:B6)

Given that the WACC=11.7%

As, IRR<WACC, the project should be rejected.