Assume That the Economy Is in a Mild Recession, and as a Result

question 37

Multiple Choice

Assume that the economy is in a mild recession, and as a result interest rates and money costs generally are relatively low. The WACC for two mutually exclusive projects that are being considered is 8%. Project S has an IRR of 20% while Project L's IRR is 15%. The projects have the same NPV at the 8% current WACC. However, you believe that the economy is about to recover, and money costs and thus your WACC will also increase. You also think that the projects will not be funded until the WACC has increased, and their cash flows will not be affected by the change in economic conditions. Under these conditions, which of the following statements is CORRECT?

• A) You should reject both projects because they will both have negative NPVs under the new conditions.
• B) You should delay a decision until you have more information on the projects, even if this means that a competitor might come in and capture this market.
• C) You should recommend Project L, because at the new WACC it will have the higher NPV.
• D) You should recommend Project S, because at the new WACC it will have the higher NPV.
• E) You should recommend Project S because it has the higher IRR and will continue to have the higher IRR even at the new WACC.

Understand the role of ethics in balancing the potential harm against the benefits of research.

Understand the scientific goals within the study of human development (describing, explaining, predicting, intervening).

Recognize the adaptive nature of human development and its significance.

Identify the primary focus areas of human development research.

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Definitions:

Notice of Assignment

A formal notification that a contract or property has been legally transferred from one party to another.

Statute of Frauds

A legal principle that requires certain types of contracts to be executed in writing and signed by the party to be charged.

Promissory Estoppel

The legal enforcement of an otherwise unenforceable contract due to a party’s detrimental reliance on the contract.

English Rule

A legal principle where the losing party in a lawsuit is required to pay the winning party's legal costs.