Projects S and L Are Equally Risky, Mutually Exclusive, and Have

question 47

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 cost of capital is 7%. Which of the following statements is CORRECT?

• A) if the cost of capital is 6%, project s will have the higher npv.
• B) if the cost of capital is 13%, project s will have the lower npv.
• C) if the cost of capital is 10%, both projects will have a negative npv.
• D) project s's npv is more sensitive to changes in cost of capital than project l's.
• E) if the cost of capital is 10%, both projects will have positive npvs.

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Definitions:

Phillips Curve

An economic concept that illustrates an inverse relationship between the rate of inflation and the unemployment rate in the short run.

Disinflates

Disinflation refers to a reduction in the rate of inflation, leading to a slower increase in the price levels of goods and services.

Unemployment Rate

The percentage of the working-age population that is unemployed and in the process of looking for a job.

Sacrifice Ratio

An economic term that refers to the amount of production or output that must be forgone in order to reduce inflation by one percentage point.