Projects S and L Are Equally Risky,mutually Exclusive,and Have Normal

question 39

Multiple Choice

Projects S and L are equally risky,mutually exclusive,and have normal cash flows.Project S has an IRR of 15%,while Project L's IRR is 12%.The two projects have the same NPV when the WACC is 7%.Which of the following statements is CORRECT?

• A) If the WACC is 10%,both projects will have positive NPVs.
• B) If the WACC is 6%,Project S will have the higher NPV.
• C) If the WACC is 13%,Project S will have the lower NPV.
• D) If the WACC is 10%,both projects will have a negative NPV.
• E) Project S's NPV is more sensitive to changes in WACC than Project L's.

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Definitions:

Inventory Turnover

A measure of how frequently a company sells and replaces its stock of goods during a period, offering insight into sales efficiency and inventory management.

Current Ratio

A liquidity ratio that measures a company's ability to pay short-term obligations or those due within one year, calculated as current assets divided by current liabilities.

Earnings Before Interest

An indicator of a company's profitability calculated by subtracting all expenses except interest from revenues, commonly referred to as EBIT.

Tax (EBIT)

Taxation calculated on Earnings Before Interest and Taxes, representing the income tax expense charged on a company's operating profit.