Two Mutually Exclusive Projects Each Have a Cost of $10,000

question 157

Multiple Choice

Two mutually exclusive projects each have a cost of $10,000.The total,undiscounted cash flows from Project L are $15,000,while the undiscounted cash flows from Project S total $13,000.Their NPV profiles cross at a discount rate of 10 percent.Which of the following statements best describes this situation?

• A) The NPV and IRR methods will select the same project if the required rate of return is greater than 10 percent;for example,18 percent.
• B) The NPV and IRR methods will select the same project if the required rate of return is less than 10 percent;for example,8 percent.
• C) To determine if a ranking conflict will occur between the two projects the required rate of return is needed as well as an additional piece of information.
• D) Project L should be selected at any required rate of return,because it has a higher IRR.
• E) Project S should be selected at any required rate of return,because it has a higher IRR.

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Definitions:

Purchase Price

The total cost incurred to acquire an asset, including the price of the asset itself along with any additional costs necessary to bring the asset to a usable state.

Treasury Stock

Stock that has been bought back by the issuing company, reducing the amount of outstanding stock on the open market.

Sold for Less

A situation where the selling price of goods or services is less than their cost or original value.

Cost

The amount of money required to purchase or produce something, including materials, labor, and overhead expenses.