Projects S and L Both Have an Initial Cost of $10,000,followed

question 23

Multiple Choice

Projects S and L both have an initial cost of $10,000,followed by a series of positive cash inflows.Project S's undiscounted net cash flows total $20,000,while L's total undiscounted flows are $30,000.At a WACC of 10%,the two projects have identical NPVs.Which project's NPV is more sensitive to changes in the WACC?

• A) Project S.
• B) Project L.
• C) Both projects are equally sensitive to changes in the WACC since their NPVs are equal at all costs of capital.
• D) Neither project is sensitive to changes in the discount rate,since both have NPV profiles that are horizontal.
• E) The solution cannot be determined because the problem gives us no information that can be used to determine the projects' relative IRRs.

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Definitions:

Availability Heuristic

A quick mental leap utilizing examples that spontaneously arise in an individual's thoughts during the evaluation of a specific subject, concept, technique, or decision-making process.

Confirmation Bias

The predisposition to explore, decode, favor, and reminisce facts in a fashion that corroborates one's preconceived notions or speculations.

Certain Outcome

An outcome that is guaranteed or known to happen without any doubt.

Risky Outcome

A potential result of an action or decision that involves uncertainty and the possibility of negative consequences.