You Are Considering Two Mutually Exclusive,equally Risky,projects

question 29

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 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.
• B) 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.
• C) For a conflict to exist between NPV and IRR, the initial investment cost of one project must exceed the cost of the other.
• D) For a conflict to exist between NPV and IRR, one project must have an increasing stream of cash flows over time while the other has a decreasing stream. If both sets of cash flows are increasing or decreasing, then it would be impossible for a conflict to exist, even if one project is larger than the other.
• E) If the two projects' NPV profiles do not cross, then there will be a sharp conflict as to which one should be selected.

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Definitions:

Percentile

A statistical measure indicating the value below which a given percentage of observations in a group falls, often used to compare scores across a population.

Mode

The value that appears most frequently in a data set, representing the most common or popular observation.

Standard Deviation

A measure of the amount of variation or dispersion in a set of values, indicating how much the values in the set differ from the mean.

Correlation Coefficient

A statistical measure that indicates the extent to which two variables fluctuate together.