Projects S and L Are Equally Risky,mutually Exclusive,and Have Normal

question 52

Multiple Choice

Projects S and L are equally risky,mutually exclusive,and have normal cash flows.Project S has an IRR of 15%,while Project L's IRR is 12%.The two projects have the same NPV when the WACC is 7%.Which of the following statements is CORRECT?

• A) If the WACC is 6%, Project S will have the higher NPV.
• B) If the WACC is 13%, Project S will have the lower NPV.
• C) If the WACC is 10%, both projects will have a negative NPV.
• D) Project S's NPV is more sensitive to changes in WACC than Project L's.
• E) If the WACC is 10%, both projects will have positive NPVs.

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Definitions:

Incremental Cash Flow

is the additional operating cash flow that an organization receives from taking on a new project.

Straight-Line Depreciation

A method of allocating the cost of a tangible asset over its useful life in equal annual increments.

Annual After-Tax Lease Payment

The yearly lease payment amount after accounting for tax deductions.