Should a Project Be Accepted If It Offers an Annual

question 88

Multiple Choice

Should a project be accepted if it offers an annual after-tax cash flow of $1,250,000indefinitely, costs $10 million, is riskier than the firm's average projects, and the firm uses a 12.5% WACC?

• A)Yes, since NPV is positive.
• B)Yes, since a zero NPV indicates marginal acceptability.
• C)No, since NPV is greater than zero.
• D)No, since NPV is negative.

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Definitions:

Secured Loan

A loan backed by collateral, reducing the risk for the lender and often resulting in a lower interest rate for the borrower.

Leveraged Lease

A lease agreement where the lessor uses borrowed funds to purchase an asset which is then leased to the lessee, allowing for tax benefits and risk-sharing.

Nonrecourse

A type of loan where the lender’s recovery is limited to the collateral pledged for the loan, with no further claim against the borrower in case of default.

Lease Payments

Lease Payments are regular payments made by a lessee to a lessor for the use of an asset over a specified period.