Projects S and L Are Equally Risky,mutually Exclusive,and Have Normal

question 39

Multiple Choice

Projects S and L are equally risky,mutually exclusive,and have normal cash flows.Project S has an IRR of 15%,while Project L's IRR is 12%.The two projects have the same NPV when the WACC is 7%.Which of the following statements is CORRECT?

• A) If the WACC is 10%,both projects will have positive NPVs.
• B) If the WACC is 6%,Project S will have the higher NPV.
• C) If the WACC is 13%,Project S will have the lower NPV.
• D) If the WACC is 10%,both projects will have a negative NPV.
• E) Project S's NPV is more sensitive to changes in WACC than Project L's.

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Definitions:

Perfectly Elastic

A situation where the demand or supply responds infinitely to changes in price, resulting in a horizontal demand or supply curve.

Perfectly Inelastic

A market condition where the quantity demanded or supplied does not change in response to price changes; the demand or supply curve is perfectly vertical.

Relatively Elastic

Describes a situation where a small change in price leads to a significant change in quantity demanded or supplied.

Marginal Revenue

The additional income received from selling one more unit of a good or service, vital for decision-making in firms.