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:

Partnership Assets

Resources owned jointly by partners in a partnership arrangement, used in the operation of the partnership business.

Cash Distribution

The payment of earnings or capital to shareholders, stakeholders, or partners by a corporation or fund.

Noncash Assets

Assets that cannot be quickly converted into cash, such as real estate, equipment, and inventory.

Liabilities

Financial obligations or debts owed by a business to external parties or individuals.