A Company Is Choosing Between Two Projects

question 107

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 $51,600,annual cash flows of $16,000 for 5 years,and an IRR of 16.65%.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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