You Are Considering Two Mutually Exclusive, Equally Risky, Projects

question 83

Multiple Choice

You are considering two mutually exclusive, equally risky, projects. Both have IRRs that exceed the WACC. Which of the following statements is CORRECT? Assume that the projects have normal cash flows, with one outflow followed by a series of inflows.

• A) If the two projects' NPV profiles do not cross, then there will be a sharp conflict as to which one should be selected.
• B) If the cost of capital is greater than the crossover rate, then the IRR and the NPV criteria will not result in a conflict between the projects. The same project will rank higher by both criteria.
• C) If the cost of capital is less than the crossover rate, then the IRR and the NPV criteria will not result in a conflict between the projects. The same project will rank higher by both criteria.
• D) For a conflict to exist between NPV and IRR, the initial investment cost of one project must exceed the cost of the other.

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Definitions:

ANOVA F Statistic

A statistic used in Analysis of Variance (ANOVA) tests to determine if there are significant differences between the means of three or more groups.

Significance Level

A threshold chosen by the researcher which the p-value must be below in order to reject the null hypothesis.

Explanatory Variables

Variables in a statistical model that are used to predict or explain changes in the dependent variable.

Deaths

The occurrence of the permanent cessation of all vital functions in a living organism, marking the end of life.