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:

Contribution Margin

The difference between the sales revenue of a product and its variable costs.

Net Present Value

The disparity between cash inflows' present value and cash outflows' present value through a certain time frame, utilized to determine an investment's profitability.

Fixed Costs

Costs that do not change with the level of output or sales, such as rent, salaries, and insurance premiums.

Cash Break-even Point

The point at which a business's cash inflows equal its cash outflows, excluding financing.