You Are Considering Two Mutually Exclusive, Equally Risky, Projects

question 15

Multiple Choice

You are considering two mutually exclusive, equally risky, projects. Both have IRRs that exceed the cost of capital. Which of the following statements is CORRECT? Assume that the projects have normal cash flows, with one outflow followed by a series of inflows.

• A) if the cost of capital is greater than the crossover rate, then the irr and the npv criteria will not result in a conflict between the projects. the same project will rank higher by both criteria.
• B) if the cost of capital is less than the crossover rate, then the irr and the npv criteria will not result in a conflict between the projects. the same project will rank higher by both criteria.
• C) for a conflict to exist between npv and irr, the initial investment cost of one project must exceed the cost of the other.
• D) for a conflict to exist between npv and irr, one project must have an increasing stream of cash flows over time while the other has a decreasing stream. if both sets of cash flows are increasing or decreasing, then it would be impossible for a conflict to exist, even if one project is larger than the other.
• E) if the two projects' npv profiles do not cross, then there will be a sharp conflict as to which one should be selected.

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Definitions:

Transactions

Economic activities or events that affect the financial position of a company, recorded in its accounting records.

Acquisition Costs

The total cost incurred to acquire an asset or service, including the purchase price and any additional costs necessary to bring the asset into working condition.

Property

Legal rights or interests in land, buildings, or other assets, which can include ownership of the asset itself and usage rights.

Equipment

Tangible property used in operations, such as machinery, computers, and tools, that is not intended for sale.