Clifford Company Is Choosing Between Two Projects

question 107

Multiple Choice

Clifford Company is choosing between two projects.The larger project has an initial cost of $100, 000, annual cash flows of $30, 000 for 5 years, and an IRR of 15.24%.The smaller project has an initial cost of $50, 000, annual cash flows of $16, 000 for 5 years, and an IRR of 16.63%.The projects are equally risky.Which of the following statements is CORRECT?

• A) Since the smaller project has the higher IRR, the two projects' NPV profiles will cross, and the larger project will look better based on the NPV at all positive values of WACC.
• B) If the company uses the NPV method, it will tend to favor smaller, shorter-term projects over larger, longer-term projects, regardless of how high or low the WACC is.
• C) Since the smaller project has the higher IRR but the larger project has the higher NPV at a zero discount rate, the two projects' NPV profiles will cross, and the larger project will have the higher NPV if the WACC is less than the crossover rate.
• D) Since the smaller project has the higher IRR and the larger NPV at a zero discount rate, the two projects' NPV profiles will cross, and the smaller project will look better if the WACC is less than the crossover rate.
• E) Since the smaller project has the higher IRR, the two projects' NPV profiles cannot cross, and the smaller project's NPV will be higher at all positive values of WACC.

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Definitions:

Intervening Cause

An event that occurs after the defendant's act and contributes to a harm, potentially relieving the defendant of liability.

Superseding Cause

An unforeseeable event that interrupts the chain of causation and becomes the primary cause of an incident, relieving the defendant of liability.

Bystanders

Individuals who are present at an event or incident but do not take part in it.

Peril

A specific risk or cause of loss covered by an insurance policy, such as fire, theft, or flood.