Corporate finance afternoon

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sofianeB

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There was a question in corporate finance during the afternoon session.
There were 4 projects with their NPVs and IRRs. The last one had I remember an NPV of 0 and an IRR of 12%. We had to choose the project that "is the most likely to earn its IRR"!
What did you answer? Project 1, 2, 3 or 4?

Thanks and again for me one of the most difficult questions.
 
The IRR calculation is similar to the YTM calculation for a bond, with WACC being the discount rate. If you have an IRR with a corresponding NPV of 0, then you know that the IRR = WACC for that project. Also note that based on the fact that the firm will reinvest cashflows for projects at WACC%, then the answer is the project with a NPV of 0 / IRR= WACC.
 
I think that your answer concerned a morning question where they asked us to deduce the WACC from a range of project. I'm not saying that you are wrong but what does "the most likely to earn its IRR" means?

Thanks
 
Like James said it implies when your NPV is zero and in this case the answer is (D). Other projects with positive NPV will IRR > WACC
 
They seem inter-realted but the question is to do with NPV Profile and thus you have think about that when answering the question.
 
I think I answered 'D' with an NPV of 0 and an IRR of 12% - because to earn the 12% IRR all cashflows must be reinvested and earn 12%, and since the WACC is 12% most projects which the cash flows would be reinvested in should earn at least 12%.
 
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