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:

GEO

Geostationary Earth Orbit; a circular orbit 35,786 kilometers above the Earth's equator and following the direction of the Earth's rotation.

LEO

Low Earth Orbit, referring to satellites that orbit the Earth at altitudes between 160 to 2,000 kilometers, primarily used for telecommunications and earth observation.

MEO

Medium Earth Orbit, a region of space around Earth located above low Earth orbit (LEO) and below geostationary orbit (GEO), often used for satellites that require broader coverage than LEO and more precision than GEO.

VEO

Stands for Violent Extremist Organizations, groups that use or advocate for violence to achieve political, ideological, or religious goals.