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This question relates to the Quiz 6.4 diagram, which shows the NPV profile for Project Z.  Project Z is an independent project and the firm as sufficient capital to undertake all projects under consideration.

If the cost of capital is 14.9%, is this project acceptable, and why/why not?

Question 3Answer

a.

It depends on whether the project is better than alternative projects the firm could undertake.

b.

No, because the NPV of the project is negative.

c.

No, because the project is only acceptable if the cost of capital is 10%.

d.

Yes, it is acceptable for all costs of capital greater than 13%.

Let's analyze the provided NPV (Net Present Value) diagram for Project Z.

From the diagram:
- The NPV profile shows how the NPV of Project Z changes with different costs of capital.
- The curve crosses the horizontal axis (where NPV = 0) at approximately 13%, indicating that this is the project's internal rate of return (IRR).
- At costs of capital above 13%, the NPV becomes negative, and at costs below 13%, the NPV is positive.

### Now let's address the question:
If the cost of capital is 14.9%, is the project acceptable?

- Since the cost of capital (14.9%) is greater than the IRR (13%), the NPV at 14.9% will be negative (as seen in the diagram). 
- For a project to be acceptable, the NPV must be positive. Since the NPV is negative at 14.9%, the project is not acceptable.

### Correct answer:
**b. No, because the NPV of the project is negative.**

Would you like further details or clarification?

### Related questions:
1. What is the significance of the Internal Rate of Return (IRR) in capital budgeting?
2. How does the cost of capital affect project decision-making?
3. Can a project with a negative NPV ever be acceptable in certain conditions?
4. Why does the NPV decrease as the cost of capital increases?
5. How would the analysis change if the project had a lower or higher IRR?

### Tip:
Always compare the cost of capital to the IRR when deciding whether a project is acceptable—if the IRR is greater, the project adds value.

This question relates to the Quiz 6.4 diagram, which shows the NPV profile for Project Z. Project Z is an independent project and the firm as sufficient capital to undertake all projects under consideration. If the cost of capital is 14.9%, is this project acceptable, and why/why not?

Understand the decision-making process for Project Z based on its NPV profile, with a focus on why a project is not acceptable when the cost of capital exceeds the IRR, using a cost of capital of 14.9% as a case study.

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