You Are Considering Two Mutually Exclusive, Equally Risky, Projects

question 54

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:

Price Elastic

Describes a situation where the demand or supply of a good or service is highly sensitive to changes in price.

Measures

Measures refer to quantitative tools or methods used for assessing, comparing, or tracking performance or progress.

Elasticity

A measure of how much the quantity demanded or supplied of a good or service changes in response to changes in price, income, or other factors.

Income Elasticity

A measure of how much the demand for a good changes in response to a change in consumers' income.