Projects a and B Are Mutually Exclusive and Have Normal

question 56

Multiple Choice

Projects A and B are mutually exclusive and have normal cash flows.Project A has an IRR of 15% and Project 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)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:

Assignment of Rights

The transfer of rights or interests in a contract or property from one party to another.

Breach of Contract

An act of failing to fulfill the terms and conditions as agreed upon in a contract, leading to legal action for redress.

Agent

One who acts under the direction of a principal for the principal’s benefit in a legal relationship known as agency. See also principal.

Gratuitous Assignment

A transfer of rights or property done freely without the expectation of receiving something in return.