Projects S and L Both Have an Initial Cost of $10,000,followed

question 19

Multiple Choice

Projects S and L both have 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 S
• B)Project L
• C)Both projects are equally sensitive to changes in the WACC since their NPVs are equal at all costs of capital.
• D)Neither project is sensitive to changes in the discount rate, since both have NPV profiles that are horizontal.

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Definitions:

Cash Flow Per Share

A measure indicating the amount of cash flow generated by a company on a per-share basis, useful for assessing financial performance and liquidity.

GAAP

A set of widely adhered-to accounting norms and guidelines for financial statements.

EPS Information

Earnings Per Share; a financial metric that represents the portion of a company's profit allocated to each outstanding share of common stock.

Operating Activities

The portion of a company's cash flow statement that details the cash generated or used in the company's primary business operations, excluding investing and financing activities.