Projects L and S Each Have an Initial Cost of $10,000,followed

question 182

Multiple Choice

Projects L and S each have an initial cost of $10,000,followed by a series of positive cash inflows.Project L has total,undiscounted cash inflows of $16,000,while S has total undiscounted inflows of $15,000.Further,at a discount rate of 10 percent,the two projects have identical NPVs.Which project's NPV will be more sensitive to changes in the discount rate? (Hint: Projects with steeper NPV profiles are more sensitive to discount rate changes. )

• A) Project S.
• B) Project L.
• C) Both projects are equally sensitive to changes in the discount rate since their NPVs are equal at all required rates of return.
• D) Neither project is sensitive to changes in the discount rate,since both have NPV profiles which are horizontal.
• E) The solution cannot be determined unless the timing of the cash flows is known.

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