Projects a and B Have Identical Expected Lives and Identical

question 42

Multiple Choice

Projects A and B have identical expected lives and identical initial cash outflows (costs) Which of the following statements is CORRECT?

• A) More of Project A's cash flows occur in the later years.
• B) More of Project B's cash flows occur in the later years.
• C) We must have information on the cost of capital in order to determine which project has the larger early cash flows.
• D) The NPV profile graph is inconsistent with the statement made in the problem.
• E) The crossover rate, i.e., the rate at which Projects A and B have the same NPV, is greater than either project's IRR.

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Definitions:

Dividends Paid

The portion of a company's earnings distributed to shareholders as a payment.

Free Cash Flow

The amount of cash generated by a company after accounting for operating expenses and capital expenditures.

Common Stock

A type of equity security that represents ownership in a corporation, giving holders voting rights and a share in the company's profits through dividends.

Indirect Method

A way of calculating cash flows from operating activities by adjusting net income for changes in non-cash working capital items.