Answer to Question #6475 in Finance for J Davis

Question

You are on the staff of Camden Inc. The CFO believes project acceptance should be based on
the NPV, but Steve Camden, the president, insists that no project should be accepted unless its IRR exceeds the project’s risk-adjusted WACC. Now you must make a recommendation on a project that has a cost of $15,000 and two cash flows: $110,000 at the end of Year 1 and -$100,000 at the end of Year 2. The president and the CFO both agree that the appropriate WACC for this project is 10%. At 10%, the NPV is $2,355.37, but you find two IRRs, one at 6.33% and one at 527%, and a MIRR of 11.32%. Which of the following statements best describes your optimal recommendation, i.e., the analysis and recommendation that is best for the company and least likely to get you in trouble with either the CFO or the president?
a. You should recommend that the project be rejected because its NPV is negative and its IRR is less than the WACC.
b. You should recommend that the project be rejected because, although its NPV is positive, i

Answer 1

At 10%, the NPV is $2,355.37, but you find two IRRs, one at 6.33% and one at 527%, and a MIRR of
11.32%.
The project should be accepted, because its MIRR > WACC and NPV > 0.