Projects A and B have identical expected lives and identical initial cash outflows (costs).However, most of one project's cash flows come in the early years, while most of the other project's cash flows occur in the later years.The two NPV profiles are given below: Which of the following statements is CORRECT?
A) More of Project B's cash flows occur in the later years.
B) We must have information on the cost of capital in order to determine which project has the larger early cash flows.
C) The NPV profile graph is inconsistent with the statement made in the problem.
D) The crossover rate, i.e., the rate at which Projects A and B have the same NPV, is greater than either project's IRR.
E) More of Project A's cash flows occur in the later years.

Question

Projects A and B have identical expected lives and identical initial cash outflows (costs).However, most of one project's cash flows come in the early years, while most of the other project's cash flows occur in the later years.The two NPV profiles are given below:  Which of the following statements is CORRECT?
A) More of Project B's cash flows occur in the later years. 
B) We must have information on the cost of capital in order to determine which project has the larger early cash flows. 
C) The NPV profile graph is inconsistent with the statement made in the problem. 
D) The crossover rate, i.e., the rate at which Projects A and B have the same NPV, is greater than either project's IRR. 
E) More of Project A's cash flows occur in the later years.

Quizplus · Accepted Answer

From the NPV profile graph, we can see that Project A has a higher NPV initially, which indicates that more of its cash flows occur in the later years. Therefore, option E is the correct answer. Option A is incorrect as it states that more of Project B's cash flows occur in the later years, which is not supported by the graph. Option B is also incorrect as the graph provides us with the information required to determine which project has larger early cash flows. Option C is incorrect as the NPV profile graph is consistent with the problem statement. Option D cannot be inferred from the given information.

Projects a and B Have Identical Expected Lives and Identical