Projects S and L Are Both Normal Projects with an Initial

question 68

Multiple Choice

Projects S and L are both normal projects with an initial cost of $10,000, followed by a series of positive cash inflows.Project S's undiscounted net cash flows total $20,000, while L's total undiscounted flows are $30,000.At a cost of capital of 10%, the two projects have identical NPVs.Which project's NPV is more sensitive to changes in the cost of capital?

• A) Project L.
• B) Both projects are equally sensitive to changes in the cost of capital since their NPVs are equal at all costs of capital.
• C) Neither project is sensitive to changes in the discount rate, since both have NPV profiles that are horizontal.
• D) The solution cannot be determined because the problem gives us no information that can be used to determine the projects' relative IRRs.
• E) Project S.

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Definitions:

Idiocentric

Characterizing individuals who are more self-reliant and independent, prioritizing their personal goals over group goals.

Group

A group refers to a number of individuals who have shared interests or goals and are perceived to be bound together in some manner.

Personal Goals

Individual objectives or aspirations that one strives to achieve, which can motivate behavior and guide actions.

Realistic Group Conflict Theory

A theory suggesting that intergroup conflict arises from competition over limited resources or conflicting goals.