Projects A and B are mutually exclusive and have normal cash flows.Project A has an IRR of 15% and 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) The crossover rate for the two projects must be 12%.
E) 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%.

Question

Quizplus · Accepted Answer

Consider the following NPV profile graph:
? 11ea856c_8b9d_85dc_9aec_71ea736d5dd3_TB1222_00 ?
We can see that statements a,d,and e are all incorrect.Statement b is also incorrect,because if the projects have the same timing pattern,then A must have the higher cost.That leaves statement c as being correct,and that conclusion is confirmed by noting that since A has the steeper slope,its cash flows must come in slower,hence B has the faster cash flows and thus the faster payback.

Projects a and B Are Mutually Exclusive and Have Normal