Projects S and L Are Both Normal Projects with an Initial

question 13

Multiple Choice

Projects S and L are both normal projects with an initial cost of $10,000,followed by a series of positive cash inflows.Project S's undiscounted net cash flows total $20,000,while L's total undiscounted flows are $30,000.At a WACC of 10%,the two projects have identical NPVs.Which project's NPV is more sensitive to changes in the WACC?

• A) Project L.
• B) Both projects are equally sensitive to changes in the WACC since their NPVs are equal at all costs of capital.
• C) Neither project is sensitive to changes in the discount rate, since both have NPV profiles that are horizontal.
• D) The solution cannot be determined because the problem gives us no information that can be used to determine the projects' relative IRRs.
• E) Project S.

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Definitions:

Court-Appointed Receiver

A neutral third party appointed by a court to manage and oversee the property or assets that are the subject of litigation, ensuring preservation of their value during the dispute.

Voluntary Liquidation

The process in which a company's directors choose to voluntarily wind up the company's affairs, distribute its assets to creditors, and officially dissolve the business.

Liquidation Preference

A term in financial agreements that specifies the order in which creditors and investors are paid in the event of a company's liquidation.

Judicial Dissolution

A legal process through which a court orders the dissolution or termination of an entity such as a corporation or partnership based on certain grounds laid by law.