Company Is Choosing Between Two Projects

question 105

Multiple Choice

company is choosing between two projects.The larger project has an initial cost of $100,000, annual cash flows of $30,000 for 5 years, and an IRR of 15.24%.The smaller project has an initial cost of $50,000, annual cash flows of $16,000 for 5 years, and an IRR of 16.63%.The projects are equally risky.Which of the following statements is CORRECT?

• A)Since the smaller project has the higher IRR, the two projects' NPV profiles cannot cross, and the smaller project's NPV will be higher at all positive values of WACC.
• B)Since the smaller project has the higher IRR, the two projects' NPV profiles will cross, and the larger project will look better based on the NPV at all positive values of WACC.
• C)If the company uses the NPV method, it will tend to favor smaller, shorter-term projects over larger, longer-term projects, regardless of how high or low the WACC is.
• D)Since the smaller project has the higher IRR but the larger project has the higher NPV at a zero discount rate, the two projects' NPV profiles will cross, and the larger project will have the higher NPV if the WACC is less than the crossover rate.
• E)Since the smaller project has the higher IRR and the larger NPV at a zero discount rate, the two projects' NPV profiles will cross, and the smaller project will look better if the WACC is less than the crossover rate.

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Definitions:

Antecedents

In logic and grammar, the elements that precede or serve as a condition to other elements, often referring to the first part of a conditional statement.

Disjuncts

In logic and grammar, parts of a disjunctive proposition that express alternatives, where the truth of any one implies the falsehood of the other(s).

Conjuncts

Components of a compound statement formed by the word "and" indicating all elements must be true.

Disjunction

A logical operation that results in true if at least one of the operands is true.