Question9 MultiFlex Industries is considering a new project that has greater-than-average risk and is expected to return 13%. MultiFlex's overall cost of capital is 8% and the project-specific cost of capital is 15%. Which of the following statements is correct? The project has a positive NPV and should be accepted. The project has a negative NPV and should be accepted. The project has a positive NPV and should be rejected. The project has a negative NPV and should be rejected. ResetMaximum marks: 1 Flag question undefined单项选择题
A
The project has a positive NPV and should be accepted.
B
The project has a negative NPV and should be accepted.
C
The project has a positive NPV and should be rejected.
D
The project has a negative NPV and should be rejected.

Question

Question9 MultiFlex Industries is considering a new project that has greater-than-average risk and is expected to return 13%. MultiFlex's overall cost of capital is 8% and the project-specific cost of capital is 15%. Which of the following statements is correct? The project has a positive NPV and should be accepted. The project has a negative NPV and should be accepted. The project has a positive NPV and should be rejected. The project has a negative NPV and should be rejected. ResetMaximum marks: 1 Flag question undefined单项选择题

A

The project has a positive NPV and should be accepted.

B

The project has a negative NPV and should be accepted.

C

The project has a positive NPV and should be rejected.

D

The project has a negative NPV and should be rejected.

BlackTom AI · Accepted Answer

Because the project's expected return (13%) is below its risk-adjusted required return (15%), the net present value (NPV) will be negative and the project should be rejected. 1) Relevant concepts: - NPV rule: accept projects with NPV > 0 (expected return > required return); reject if NPV < 0. - Use a risk-adjusted cost of capital (project-specific discount rate) when a project’s risk differs from the firm average; the firm-wide 8% is not appropriate for a higher-risk project. 2) Step-by-step reasoning: - The project’s expected return = 13%. - The correct discount rate for this higher-risk project = 15% (project-specific cost of capital). - Since expected return < required return (13% < 15%), present value of future cash flows discounted at 15% will be less than the cost today → NPV < 0 → reject. 3) Numerical illustration (all intermediate steps): - Suppose an initial investment of 100 and cash inflow after one year equal to 100 × (1 + 0.13) = 113 (this yields a 13% return). - Discount that inflow at 15%: PV = 113 / 1.15 = 98.26. - NPV = PV − initial investment = 98.26 − 100 = −1.74 (negative). - If one incorrectly used the firm-wide 8%: PV = 113 / 1.08 = 104.63 → NPV = +4.63 (positive), but this would mislead because it ignores project risk. 4) Why the correct answer is correct: - The risk-adjusted required return (15%) is the appropriate hurdle. The project’s return does not meet this hurdle, so it destroys value. 5) Why the other answer choices are incorrect: - “Positive NPV and accept”: incorrect because 13% < 15%, so NPV is not positive when discounted at the correct rate. - “Negative NPV and accept”: contradicts the NPV decision rule (do not accept negative NPV). - “Positive NPV and reject”: inconsistent (positive NPV warrants acceptance). 6) Conclusion: The project has a negative NPV and should be rejected. This matches the provided answer: "The project has a negative NPV and should be rejected."