Should a Project Be Accepted If It Offers an Annual

question 112

Multiple Choice

Should a project be accepted if it offers an annual after-tax cash flow of $1,250,000 indefinitely, 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 zero
• D)No, since NPV is negative NPV = -10 million + $1.25 million/.125
• = -10 + 10
• = 0

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Definitions:

Capital Expenditures

Funds used by a company to acquire, upgrade, and maintain physical assets such as property, buildings, or equipment.

Investing Activities

Transactions involving the purchase and sale of long-term assets and investments, reflected in a company's cash flow statement.

Cash Flows

Cash flows refer to the inflows and outflows of cash and cash equivalents in a business. Understanding cash flows is crucial for assessing a company's liquidity, flexibility, and overall financial performance.

Investing Activities

Transactions involving the purchase and sale of long-term assets and investments, as reported in a company's cash flow statement.