Two mutually exclusive projects each have a cost of $10,000. The total, undiscounted cash flows from Project L are $15,000, while the undiscounted cash flows from Project S total $13,000. Their NPV profiles cross at a discount rate of 10 percent. Which of the following statements best describes this situation?
A) The NPV and IRR methods will select the same project if the cost of capital is greater than 10 percent; for example, 18 percent.
B) The NPV and IRR methods will select the same project if the cost of capital is less than 10 percent; for example, 8 percent.
C) To determine if a ranking conflict will occur between the two projects the cost of capital is needed as well as an additional piece of information.
D) Project L should be selected at any cost of capital, because it has a higher IRR.
E) Project S should be selected at any cost of capital, because it has a higher IRR.

Question

Quizplus · Accepted Answer

When the cost of capital is greater than the crossover rate of 10%, the NPV method will select the project with the higher NPV at that rate, which will be the same as the project selected by the IRR method.

Two Mutually Exclusive Projects Each Have a Cost of $10,000