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    Finance: IRR, WACC, NPV, which project to accept

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    Project A has an internal rate of return of 15 percent. Project B has an IRR of 14 percent. Both projects have a cost of capital of 12 percent. Which of the following statements is most correct?

    a. Both projects have a positive net present value.
    b. Project A must have a higher NPV than Project B.
    c. If the cost of capital were less than 12 percent, Project B would have a higher IRR than Project A.
    d. Statements a and c are correct.
    e. Statements a, b and c are correct.

    Project X and Y have an IRR of 20% and 15% respectively. Both projects have a positive net present value. Which of the following statements is most correct?

    a. Project X must have a higher NPV than Project Y.
    b. If both projects have the same WACC, Project X must have a higher NPV.
    c. Project X must have a shorter payback than Project Y.
    d. Project X payback is shorter because it considered cash flows beyond the payback period.
    e. None of the aobve answers is correct.

    A company estimates that its WACC is 10 percent. Which of the following independent projects should the company accept?

    a. Project A requires an up front expenditure of $1,000,000 and generates an NPV of $3000.
    b. Project B has a modified internal rate of return of 9.5%.
    c. Project C requires and up front expenditure of $1,000,000 and generates an IRR of 9.7%.
    d. Project D has an IRR of 9.5%.
    e. None of the projects above should be accepted.

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    Solution Preview

    Project A has an internal rate of return of 15 percent. Project B has an IRR of 14 percent. Both projects have a cost of capital of 12 percent. Which of the following statements is most correct?

    a. Both projects have a positive net present value.
    This is correct as IRR > WACC for both projects

    b. Project A must have a higher NPV than Project B.
    Not necessary For example, we may have
    Year Project A Project B
    0 -100 -10000
    1 +115 +11400
    Here the NPV of B will be higher.

    c. If the cost of capital were less than 12 percent, Project B would have a higher IRR than ...

    Solution Summary

    The solution shows all the calculations together with explanations to arrive at the correct answers.

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