Projects a and B Both Require an Initial Investment of $100,000.Project

question 139

Multiple Choice

Projects A and B both require an initial investment of $100,000.Project A produces $200,000 in cash flows in the subsequent 5 years.Project B produces cash flow of $400,000 next year,$300,000 in year 2,$200,000 in year 3,and $50,000 in years 4 and 5.Which of the following is TRUE?

• A)The NPV of project A will be more sensitive to changes in the cost of capital compared to the NPV of project B.
• B)The NPV of project B will be more sensitive to changes in the cost of capital compared to the NPV of project A.
• C)The two projects have NPVs that are equally sensitive to changes in the cost of capital.
• D)Neither project's NPV is sensitive to changes in the cost of capital.

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Definitions:

Natural Log

The logarithm to the base \(e\), where \(e\) is an irrational and transcendental constant approximately equal to 2.71828.

Probability

A measure of the likelihood of a given event happening, often expressed as a number between 0 and 1.

Von Neuman-Morgenstern

Refers to the theory of expected utility, formulated by John von Neumann and Oskar Morgenstern, which addresses choices made under conditions of risk.

Expected Utility Function

A mathematical expression that represents a consumer's preference for uncertain outcomes, weighting each outcome by its probability of occurrence.