Projects A and B have the same expected lives and initial cash outflows.However, one project's cash flows are larger in the early years, while the other project has larger cash flows in the later years.The two NPV profiles are given below: Which of the following statements is correct?
A)Project A has the smaller cash flows in the later years.
B)Project A has the larger cash flows in the later years.
C)We require information on the required rate of return in order to determine which project has larger early cash flows.
D)The NPV profile graph is inconsistent with the statement made in the problem.
E)None of the above statements is correct.

Question

Projects A and B have the same expected lives and initial cash outflows.However, one project's cash flows are larger in the early years, while the other project has larger cash flows in the later years.The two NPV profiles are given below:  Which of the following statements is correct?
A)Project A has the smaller cash flows in the later years. 
B)Project A has the larger cash flows in the later years. 
C)We require information on the required rate of return in order to determine which project has larger early cash flows. 
D)The NPV profile graph is inconsistent with the statement made in the problem. 
E)None of the above statements is correct.

Quizplus · Accepted Answer

The NPV profile for Project A starts high and decreases over time, while the NPV profile for Project B starts low and increases over time. This indicates that Project A has larger cash flows in the earlier years and smaller cash flows in the later years, while Project B has smaller cash flows in the earlier years and larger cash flows in the later years. Therefore, statement A is incorrect and statement B is correct. Information on the required rate of return is not needed to determine which project has larger early cash flows, so statement C is incorrect. The NPV profile graph is consistent with the statement made in the problem, so statement D is incorrect. Thus, the answer is B.

Projects a and B Have the Same Expected Lives and Initial