Westchester Corp.is considering two equally risky,mutually exclusive projects,both of which have normal cash flows.Project A has an IRR of 11%,while Project B's IRR is 14%.When the WACC is 8%,the projects have the same NPV.Given this information,which of the following statements is correct?
A)If the WACC is 13%, Project A's NPV will be higher than Project B's.
B)If the WACC is 9%, Project A's NPV will be higher than Project B's.
C)If the WACC is 6%, Project B's NPV will be higher than Project A's.
D)If the WACC is 9%, Project B's NPV will be higher than Project A's.

Question

Quizplus · Accepted Answer

When the WACC is 8%, the projects have the same NPV, which means the projects' cash inflows equal the cash outflows, and the sum of the present value of all cash inflows equals the sum of the present value of all cash outflows.

At WACC of 9%, the NPV of Project A will decrease, while the NPV of Project B will increase. Project B has a higher IRR, which means it will generate more cash inflow per dollar invested than Project A. Thus, Project B's cash flows are relatively more significant at a higher discount rate, and its NPV will increase more than Project A's NPV decreases. Therefore, Project B will have a higher NPV at WACC of 9%.

Therefore, the correct answer is D) If the WACC is 9%, Project B's NPV will be higher than Project A's.