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I don't understand the following question
I don't understand the following question. I know the answer it E, but I'm not sure why. How is it possible to compute the NPV ( = C(0) + [C(1)/(1+r)^1]...without knowing R? If it's considering Project A, the question has no indication of a cost of capital/risk associated with it. Help??
4. Bottleneck Industries is considering project A. The project has expected cash flows of -$30,000 today, $40,000 in 1 year, -$50,000 in 2 years, and $60,000 in 3 years. The weighted-average cost of capital for Bottleneck Industries is 26.53 percent. Which one of the following assertions is true?
A. The NPV of project A cannot be computed, because the project’s expected cash flows are not conventional and it is impossible to compute the NPV of a project with expected cash flows that are not conventional
B. The NPV of project A equals an amount that is less than or equal to ?$5.00
C. The NPV of project A equals an amount that is greater than ?$5.00 but less than $5.00
D. The NPV of project A equals an amount that is equal to or greater than $5.00
E. Even though project A’s expected cash flows are not conventional and even though it is possible to compute the NPV of a project with expected cash flows that are not conventional, the NPV of project A can not be compute
Expert Solution
The Correct answer is E
Explanation: We have given the Weighted average cost of capital of the Company but not the project, It could be possible that the project would be more or less risky as WACC of company shows the risk or cost of company's asset not the project.
Thus, There is no information given about the WACC of the project, However, The NPV can be calculated for convetional or non conventional cash flows But only when we know the WACC of the project.
Therefore, the correct answer is Option E
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