Which of the following statements is correct?
A) Because discounted payback takes account of the cost of capital, a project's discounted payback is normally shorter than its regular payback.
B) The NPV and IRR methods use the same basic equation, but in the NPV method the discount rate is specified and the equation is solved for NPV, while in the IRR method the NPV is set equal to zero and the discount rate is found.
C) If the cost of capital is less than the crossover rate for two mutually exclusive projects' NPV profiles, a NPV/IRR conflict will not occur.
D) If you are choosing between two projects which have the same life, and if their NPV profiles cross, then the smaller project will probably be the one with the steeper NPV profile.
E) If the cost of capital is relatively high, this will favor larger, longer-term projects over smaller, shorter-term alternatives because it is good to earn high rates on larger amounts over longer periods.

Question

Quizplus · Accepted Answer

The statement describes the differences between the NPV and IRR methods accurately. Statement A is incorrect because discounted payback means taking into consideration the time taken to recover the initial investment, not the cost of capital. Statement C is incorrect because the NPV/IRR conflict occurs when two competing projects have different scales, not when the cost of capital is less than the crossover rate. Statement D is incorrect because the statement may or may not be true since the slope of the NPV profile depends on the project's cash flow pattern. Statement E is incorrect because a high cost of capital would negatively affect larger, longer-term projects as they require a more extended period to recover their initial investments.

Which of the Following Statements Is Correct