Projects S and L Are Both Normal Projects with an Initial

question 70

Multiple Choice

Projects S and L are both normal projects with 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 cost of capital of 10%, the two projects have identical NPVs. Which project's NPV is more sensitive to changes in the cost of capital?

• A) project l.
• B) both projects are equally sensitive to changes in the cost of capital since their npvs are equal at all costs of capital.
• C) neither project is sensitive to changes in the discount rate, since both have npv profiles that are horizontal.
• D) the solution cannot be determined because the problem gives us no information that can be used to determine the projects' relative irrs.
• E) project s.

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Definitions:

Adjusting Entries

Journal entries used to adjust account balances in order to reflect more accurate financial information at the end of an accounting period.

Journal Entry

A record in accounting that notes a specific financial transaction in the books.

Debit Amount

A financial entry that increases an asset or expense account, or decreases a liability, equity, or revenue account.

Credit

A financial term that refers to the provision of resources (such as funds) by one party to another, where the second party does not repay the first party immediately but incurs a debt and is usually obliged to pay interest.