Projects S and L Are Equally Risky, Mutually Exclusive, and Have

question 88

Multiple Choice

Projects S and L are equally risky, mutually exclusive, and have normal cash flows.Project S has an IRR of 15%, while Project L's IRR is 12%.The two projects have the same NPV when the WACC is 7%.Which of the following statements is CORRECT?

• A) If the WACC is 6%, Project S will have the higher NPV.
• B) If the WACC is 13%, Project S will have the lower NPV.
• C) If the WACC is 10%, both projects will have a negative NPV.
• D) Project S's NPV is more sensitive to changes in WACC than Project L's.
• E) If the WACC is 10%, both projects will have positive NPVs.

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Definitions:

Comparative Advantage

The capacity of a nation, person, firm, or area to create a product or offer a service at a reduced opportunity cost compared to that of its rivals.

Opportunity Cost

The potential benefit that is given up when choosing one alternative over another.

Comparative Advantage

The ability of a party to produce a particular good or service at a lower marginal cost than others.

Steel

An alloy of iron and carbon, and sometimes other elements, used as a primary material in buildings, infrastructure, tools, ships, automobiles, machines, appliances, and weapons.