Question

Question 1 5 pts What is WACC? Why is it important? O The firm's required return. It is used as the discount rate in NPV and it is used to compare to IRR. O It is the required return on debt. O It is the firm's required return. If IRR is less than WACC, you should accept the project. O It is the required return on equity.

Answer 1

Answer 1)

Correct answer is Option A. WACC - The firms' required return. It is used as a discount rate in NPV and is used to compare to IRR

Answer 2)

Correct answer is Option C. It ignores time value of money.

Answer 3)

NPV is given by:

NPV = L Rt/(1 + i) ,t varies from 1 ton where Rt = Cash flow netted (Inflow - Outflow) during the period "t" i = Discount rate t = number of periods

Hence,

NPV = -500 + 200 / 1.06^1 + 300 / 1.06^2 + 250 / 1.06^3 + 125 / 1.06^4

So correct answer is Option C.

Answer 4)

The discount rate at which NPV = 0 is known as IRR

Hence,

0 = -500 + 125 / (1 + irr)^1 + 250 / (1 + irr)^2 + 175 / (1 + irr)^3 + 195 / (1 + irr)^4

So correct answer is Option A.