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

question 23

Multiple Choice

Projects S and L both have an initial cost of $10,000,followed by a series of positive cash inflows.Project S's undiscounted net cash flows total $20,000,while L's total undiscounted flows are $30,000.At a WACC of 10%,the two projects have identical NPVs.Which project's NPV is more sensitive to changes in the WACC?

• A) Project S.
• B) Project L.
• C) Both projects are equally sensitive to changes in the WACC 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 that are horizontal.
• E) The solution cannot be determined because the problem gives us no information that can be used to determine the projects' relative IRRs.

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Definitions:

Dogfish Shark

The dogfish shark is a type of small to medium-sized shark belonging to the family Squalidae, often found in both deep and shallow waters.

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A group of fish characterized by having a skeleton primarily composed of bone rather than cartilage.

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Coelacanth

An ancient order of fish thought to be extinct for millions of years until a living specimen was found in 1938, known for its lobed fins.