Projects S and L both have normal cash flows,and the projects have the same risk; hence,both are evaluated with the same WACC,10%.However,S has a higher IRR than L.Which of the following statements is correct?
A)Project S must have a higher NPV than Project L.
B)If Project S has a positive NPV, then Project L must also have a positive NPV.
C)If the WACC falls, then each project's IRR will increase.
D)If Projects S and L have the same NPV at the current WACC, 10%, then Project L, the one with the lower IRR, would have a higher NPV if the WACC used to evaluate the projects declined.

Question

Quizplus · Accepted Answer

Explanation: The statement in D is correct because when evaluating projects with different IRRs, if they have the same NPV at a certain discount rate (in this case, the WACC of 10%), the project with the lower IRR (Project L) will have a higher NPV if the discount rate decreases. This is due to the relationship between NPV and discount rates: as the discount rate decreases, the NPV of projects generally increases, and the project with the lower IRR will see a relatively larger increase in NPV because its cash flows are discounted less steeply.

Projects S and L Both Have Normal Cash Flows,and the Projects