Asked by Patrick Pedersen on May 03, 2024
Verified
Which of the following statements is correct? Assume that the project being considered has normal cash flows,with one outflow followed by a series of inflows.
A) A project's regular IRR is found by compounding the initial cost at the WACC to find the terminal value (TV) , then discounting the TV at the WACC.
B) A project's regular IRR is found by compounding the cash inflows at the WACC to find the present value (PV) , then discounting to find the IRR.
C) If a project's IRR is smaller than the WACC, then its NPV will be positive.
D) A project's IRR is the discount rate that causes the PV of the inflows to equal the project's cost.
Internal Rate of Return (IRR)
The discount rate at which the net present value of all cash flows (positive and negative) from a project or investment equals zero.
Weighted Average Cost of Capital (WACC)
WACC represents the average rate that a company is expected to pay to finance its assets, weighted by the proportion of debt and equity financing.
Terminal Value (TV)
Value of operations at the end of the explicit forecast period; it is equal to the present value of all free cash flows beyond the forecast period, discounted back to the end of the forecast period at the weighted average cost of capital.
- Acquire knowledge about the situations in which a project is characterized by multiple Internal Rates of Return and its impact on financial planning for investments.
Verified Answer
ZK
Zybrea KnightMay 05, 2024
Final Answer :
D
Explanation :
The IRR is the discount rate at which the project's cash inflows equal the initial outflow, so the PV of the inflows minus the initial outflow is zero. Therefore, the IRR is the discount rate that causes the PV of the inflows to equal the initial cost.
Learning Objectives
- Acquire knowledge about the situations in which a project is characterized by multiple Internal Rates of Return and its impact on financial planning for investments.