Projects a and B Are Mutually Exclusive and Have Normal

question 96

Multiple Choice

Projects A and B are mutually exclusive and have normal cash flows. Project A has an IRR of 15% and 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) The crossover rate for the two projects must be 12%.
• E) 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%.
• Problems

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Definitions:

Factory Overhead

All the indirect costs associated with manufacturing, excluding direct materials and direct labor. Examples include utilities, depreciation on manufacturing equipment, and factory manager salary.

President's Salary

The compensation awarded to the president of a company or organization, comprising base salary and potentially bonuses or other earnings.

Direct Labor

The wages paid to workers directly involved in the manufacturing or production of goods or services.

Not a Product Cost

Refers to expenses not directly associated with the production of goods, such as selling and administrative expenses.