Projects S and L Both Have Normal Cash Flows,and the Projects

question 55

Multiple Choice

Projects S and L both have normal cash flows,and the projects have the same risk,hence both are evaluated with the same WACC,10%.However,S has a higher IRR than L.Which of the following statements is CORRECT?

• A) Project S must have a higher NPV than Project L.
• B) If Project S has a positive NPV,Project L must also have a positive NPV.
• C) If the WACC falls,each project's IRR will increase.
• D) If the WACC increases,each project's IRR will decrease.
• E) If Projects S and L have the same NPV at the current WACC,10%,then Project L,the one with the lower IRR,would have a higher NPV if the WACC used to evaluate the projects declined.

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Definitions:

Coase Theorem

An economic theory stating that if trade in an externality is possible and there are no transaction costs, bargaining will lead to an efficient outcome regardless of the initial allocation of property rights.

Externalities

Economic side effects or consequences that affect uninvolved third parties; can be positive or negative.

External Costs

Costs generated by a production or consumption activity that are not borne by the producer or consumer but by society at large.

Transaction Costs

Costs associated with the process of buying and selling, including search and information costs, bargaining costs, and enforcement costs.