Projects a and B Are Mutually Exclusive and Have Normal

question 1

Multiple Choice

Projects A and B are mutually exclusive and have normal cash flows.Project A has an IRR of 15% and B's IRR is 20%.The company's WACC is 12%,and at that rate Project A has the higher NPV.Which of the following statements is CORRECT?

• A) The crossover rate for the two projects must be less than 12%.
• B) Assuming the timing pattern of the two projects' cash flows is the same,Project B probably has a higher cost (and larger scale).
• C) Assuming the two projects have the same scale,Project B probably has a faster payback than Project A.
• D) The crossover rate for the two projects must be 12%.
• E) Since B has the higher IRR,then it must also have the higher NPV if the crossover rate is less than the WACC of 12%.

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Definitions:

Total Asset Turnover

A financial ratio that measures the efficiency of a company's use of its assets in generating sales revenue; calculated by dividing sales by total assets.

Fixed-Asset Turnover

A financial ratio that measures a company's efficiency in using its fixed assets to generate sales, indicating how well assets are being managed.

EVA

Economic Value Added is a measure of a company's financial performance based on the residual wealth calculated by deducting its cost of capital from its operating profit, adjusted for taxes on a cash basis.

Net Income

Net income is the total profit of a company after all expenses, taxes, and costs have been subtracted from total revenue.