A Company Is Choosing Between Two Projects

question 11

Multiple Choice

A company is choosing between two projects. The larger project has an initial cost of $100,000, annual cash flows of $30,000 for 5 years, and an IRR of 15.24%. The smaller project has an initial cost of $50,000, annual cash flows of $16,000 for 5 years, and an IRR of 16.63%. The projects are equally risky. Which of the following statements is CORRECT?

• A) Since the smaller project has the higher IRR, the two projects' NPV profiles cannot cross, and the smaller project's NPV will be higher at all positive values of WACC.
• B) Since the smaller project has the higher IRR, the two projects' NPV profiles will cross, and the larger project will look better based on the NPV at all positive values of WACC.
• C) If the company uses the NPV method, it will tend to favor smaller, shorter-term projects over larger, longer-term projects, regardless of how high or low the WACC is.
• D) Since the smaller project has the higher IRR but the larger project has the higher NPV at a zero discount rate, the two projects' NPV profiles will cross, and the larger project will have the higher NPV if the WACC is less than the crossover rate.
• E) Since the smaller project has the higher IRR and the larger NPV at a zero discount rate, the two projects' NPV profiles will cross, and the smaller project will look better if the WACC is less than the crossover rate.

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Definitions:

Accelerating Inflation Theory

A theory suggesting that inflation will speed up as demand grows and outpaces supply, leading to a continuous increase in price levels.

Monetarist Point

A viewpoint in economics that emphasizes the role of governments in controlling the amount of money in circulation through monetary policy.

Velocity Of Money

The rate at which money is exchanged from one transaction to another, often used to gauge the health of an economy.

Money Supply

The entirety of monetary assets present in an economy, such as cash, coins, and balances in checking and saving accounts, at a certain point in time.