Clifford Company Is Choosing Between Two Projects

question 89

Multiple Choice

Clifford 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 will cross, and the larger project will look better based on the NPV at all positive values of WACC.
• B) 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.
• C) 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.
• D) 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.
• E) 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.

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Definitions:

Cost Per Unit

A measure of the cost incurred in the production, creation, or acquisition of a single unit of a product or service.

Activity Level

A measure of the volume or quantity of production or operations in a business, which can significantly impact costs and budgeting.

Variable Costs

Expenses that fluctuate with the level of output or business activity.

Fixed Manufacturing Overhead

The portion of total manufacturing overhead costs that remains constant regardless of the level of production, such as factory rent or salaries of permanent staff.