Projects a and B Are Mutually Exclusive and Have Normal

question 56

Multiple Choice

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

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

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Definitions:

Use Value

The practical utility or usefulness of a commodity or service to meet human needs.

Fetishism of Commodities

A concept in Marxist theory referring to the perception of the social relationships involved in production, not as relationships among people, but as economic relationships among the money and commodities exchanged in the market.

Capitalism

An economic system characterized by private or corporate ownership of capital goods, by investments determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market.

Reifies

Converts abstract concepts into concrete entities.