Projects a and B Have Identical Expected Lives and Identical

question 6

Multiple Choice

Projects A and B have identical expected lives and identical initial cash outflows (costs) . However, most of one project's cash flows come in the early years, while most of the other project's cash flows occur in the later years. The two NPV profiles are given below: Which of the following statements is CORRECT?

• A) More of Project B's cash flows occur in the later years.
• B) We must have information on the cost of capital in order to determine which project has the larger early cash flows.
• C) The NPV profile graph is inconsistent with the statement made in the problem.
• D) The crossover rate, i.e., the rate at which Projects A and B have the same NPV, is greater than either project's IRR.
• E) More of Project A's cash flows occur in the later years.

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Definitions:

Over Budget

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Budget

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A measure used for allocating costs to cost objects, typically related to the level of activity or volume of goods produced that incurs costs.

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