Projects a and B Have Identical Expected Lives and Identical

question 6

Multiple Choice

Projects A and B have identical expected lives and identical initial cash outflows (costs) .However,most of one project's cash flows come in the early years,while most of the other project's cash flows occur in the later years.The two NPV profiles are given below:
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Which of the following statements is CORRECT?

• A)More of Project A's cash flows occur in the later years.
• B)More of Project B's cash flows occur in the later years.
• C)We must have information on the cost of capital in order to determine which project has the larger early cash flows.
• D)The NPV profile graph is inconsistent with the statement made in the problem.
• E)The crossover rate, i.e., the rate at which Projects A and B have the same NPV, is greater than either project's IRR.

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Definitions:

Retained Earnings

The portion of net income left over for a business after it has paid out dividends to its shareholders.

Acquisition Value

Acquisition Value is the total cost incurred to acquire an asset, including the purchase price and all related expenses.

Acquired Net Assets

The total assets purchased from a company during an acquisition minus the liabilities assumed in the process.

Equipment Account

An account on the balance sheet where the cost of purchasing equipment is recorded and progressively depreciated over time.