Projects a and B Are Mutually Exclusive and Have Normal

question 17

Multiple Choice

Projects A and B are mutually exclusive and have normal cash flows.Project A has an IRR of 15% and B's IRR is 20%.The company's cost of capital is 12%, and at that rate Project A has the higher NPV.Which of the following statements is CORRECT?

• A) Assuming the timing pattern of the two projects' cash flows is the same, Project B probably has a higher cost (and larger scale).
• B) Assuming the two projects have the same scale, Project B probably has a faster payback than Project A.
• C) The crossover rate for the two projects must be 12%.
• D) Since B has the higher IRR, then it must also have the higher NPV if the crossover rate is less than the cost of capital of 12%.
• E) The crossover rate for the two projects must be less than 12%.

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Definitions:

Dividend Preference

A feature of preferred shares granting holders the right to receive dividends before common shareholders in the event of a dividend distribution.

Preferred Stock

A class of ownership in a corporation that has a higher claim on assets and earnings than common stock, often with dividends that are paid out before those of common shareholders.

Treasury Stock

Securities initially released and afterward repurchased by the issuer, lessening the total shares actively traded in the market.

Reissued

When a previously issued stock or bond is sold again by the corporation, often after being bought back from the market.