Two Mutually Exclusive Projects Each Have a Cost of $10,000

question 22

Multiple Choice

Two mutually exclusive projects each have a cost of $10,000. The total, undiscounted cash flows from Project L are $15,000, while the undiscounted cash flows from Project S total $13,000. Their NPV profiles cross at a discount rate of 10 percent. Which of the following statements best describes this situation?

• A) The NPV and IRR methods will select the same project if the cost of capital is greater than 10 percent; for example, 18 percent.
• B) The NPV and IRR methods will select the same project if the cost of capital is less than 10 percent; for example, 8 percent.
• C) To determine if a ranking conflict will occur between the two projects the cost of capital is needed as well as an additional piece of information.
• D) Project L should be selected at any cost of capital, because it has a higher IRR.
• E) Project S should be selected at any cost of capital, because it has a higher IRR.

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Definitions:

Output Effect

The impact that changes in production levels have on a company's total revenue, often influenced by market demand and price.

Fixed Proportions

A production scenario where inputs must be combined in strict, fixed ratios to produce an output, allowing no substitutions.

MRP

Stands for Material Requirements Planning, a system for calculating the materials and components needed to manufacture a product.

Wage Rate

The amount of money paid to workers for their services, usually expressed per hour or per unit of work done.