A Company Is Choosing Between Two Projects

question 41

Multiple Choice

A company is choosing between two projects. The larger project has an initial cost of $100,000, annual cash flows of $30,000 for 5 years, and an IRR of 15.24%. The smaller project has an initial cost of $50,000, annual cash flows of $16,000 for 5 years, and an IRR of 16.63%. The projects are equally risky. Which of the following statements is CORRECT?

• A) Since the smaller project has the higher IRR, the two projects' NPV profiles cannot cross, and the smaller project's NPV will be higher at all positive values of WACC.
• B) Since the smaller project has the higher IRR, the two projects' NPV profiles will cross, and the larger project will look better based on the NPV at all positive values of WACC.
• C) If the company uses the NPV method, it will tend to favor smaller, shorter-term projects over larger, longer-term projects, regardless of how high or low the WACC is.
• D) Since the smaller project has the higher IRR but the larger project has the higher NPV at a zero discount rate, the two projects' NPV profiles will cross, and the larger project will have the higher NPV if the WACC is less than the crossover rate.

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Definitions:

Major Life Change

A major life change refers to a significant transformation or transition in an individual's life, which can impact their lifestyle, relationships, or identity.

Entropy Term

A thermodynamic quantity representing the degree of disorder or randomness in a system, significant in predicting the spontaneity of processes.

ΔG°

Standard Gibbs free energy change, a thermodynamic quantity indicating the spontaneity of a reaction at standard conditions; negative values suggest spontaneity.

Exothermic

A chemical reaction or process that releases heat to its surroundings.