Projects A and B have identical expected lives and identical initial cash outflows (costs).However,most of one project's cash flows come in the early years,while most of the other project's cash flows occur in the later years.The two NPV profiles are given below: Which of the following statements is CORRECT?
A)More of Project B's cash flows occur in the later years.
B)We must have information on the cost of capital in order to determine which project has the larger early cash flows.
C)The NPV profile graph is inconsistent with the statement made in the problem.
D)The crossover rate, i.e., the rate at which Projects A and B have the same NPV, is greater than either project's IRR.
E)More of Project A's cash flows occur in the later years.

Question

Projects A and B have identical expected lives and identical initial cash outflows (costs).However,most of one project's cash flows come in the early years,while most of the other project's cash flows occur in the later years.The two NPV profiles are given below:  Which of the following statements is CORRECT?
A)More of Project B's cash flows occur in the later years. 
B)We must have information on the cost of capital in order to determine which project has the larger early cash flows. 
C)The NPV profile graph is inconsistent with the statement made in the problem. 
D)The crossover rate, i.e., the rate at which Projects A and B have the same NPV, is greater than either project's IRR. 
E)More of Project A's cash flows occur in the later years.

Quizplus · Accepted Answer

Statement e is true and the other statements are false. Distant cash flows are more severely penalized by high discount rates, so if the NPV profile line has a steep slope, this indicates that cash flows occur relatively late.

Projects a and B Have Identical Expected Lives and Identical