NPV, IRR, and ROIC · Flashcards

Question

How is NPV defined for a capital project?

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Answer

Present value of all project cash flows discounted at $r$ .

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Question

When $N P V$ and $I R R$ disagree, why is $N P V$ preferred on an exam?

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Answer

Because $N P V$ is the correct value-based metric.

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Question

Why should accepting a positive- $N P V$ project increase share price?

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Answer

It increases firm value by the project's $N P V$ per share.

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Question

What does it imply if $R O I C > W A C C$ ?

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Answer

The firm is creating value.

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