Projects L and S Each Have an Initial Cost of $10,000

question 11

Multiple Choice

Projects L and S each have an initial cost of $10,000, followed by a series of positive cash inflows. Project L has total, undiscounted cash inflows of $16,000, while S has total undiscounted inflows of $15,000. Further, at a discount rate of 10 percent, the two projects have identical NPVs. Which project's NPV will be more sensitive to changes in the discount rate? (Hint: Projects with steeper NPV profiles are more sensitive to discount rate changes.)

• A) Project S.
• B) Project L.
• C) Both projects are equally sensitive to changes in the discount rate since their NPVs are equal at all costs of capital.
• D) Neither project is sensitive to changes in the discount rate, since both have NPV profiles which are horizontal.
• E) The solution cannot be determined unless the timing of the cash flows is known.

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Definitions:

Employee Fraud

Dishonest activities conducted by employees to steal or misuse an organization's resources or assets for personal gain.

Primary Factors

Fundamental elements or causes that contribute significantly to a result, situation, or process.

Deposits In Transit

Funds that have been deposited by a company but not yet recorded by its bank, leading to discrepancies in bank reconciliation.

Outstanding Checks

Checks that have been written and recorded in the payer’s ledger but have not yet been cashed or cleared by the bank.