McCall Manufacturing has a WACC of 10%. The firm is considering two normal, equa
ID: 2621142 • Letter: M
Question
McCall Manufacturing has a WACC of 10%. The firm is considering two normal, equally risky, mutually exclusive, but not repeatable projects. The two projects have the same investment costs, but Project A has an IRR of 15%, while Project B has an IRR of 20%. Assuming the projects' NPV profiles cross in the upper right quadrant, which of the following statements is CORRECT? a. If the crossover rate is 8%, Project B will have the higher NPV oice 11-048 : 100% Correct have a negative NPV. c. Only one project has a positive NPV. O d. If the crossover rate is 8%, Project A will have the higher NPV e. Since the projects are mutually exclusive, the firm should always select Project B.Explanation / Answer
The project with the higher IRR has a lower NPV. Thus, at discount rate of 8% and below, Project A has a higher NPV but above 8%, Project B has a higher NPV. Since the WACC is 10 % which is greater than NPV, Project B has a higher NPV.
Hence, correct option is “If the crossover rate is 8%. Project B will have the higher NPV.”