Projects a and B Have Identical Expected Lives and Identical

question 40

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:
Which of the following statements is CORRECT?

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

---

Definitions:

Capital

Assets such as funds, equipment, and real estate used in business operations that contribute to the production of goods and services.

Labor

The human effort, either physical or mental, that is used in the production of goods and services.

MRP

Marginal Revenue Product, the additional revenue generated by employing one more unit of a resource, such as labor or capital.

Capital

Financial assets or the financial value of assets, such as funds held in deposit accounts, as well as the physical factors of production including machinery, buildings, and land.