ID: D 30) Project A and Project B are mutually exclusive projects with equal ris
ID: 2804946 • Letter: I
Question
ID: D 30) Project A and Project B are mutually exclusive projects with equal risk Project A has an internal rate of return of 12 percent, while Project B has an internal rate of return of 15 percent. The two projects have the same net present value when the cost of capital is 7 percent. (In other words, the crossover rate is 7 percent.) Assume each project has an initial cash outflow followed by a series of inflows. Which of the following statements is most correct? A. If the cost of capital is 10 percent, each project will have a positive net present value. B. If the cost of capital is 6 percent, Project B has a higher net present value than Project A. C. If the cost of capital is 13 percent, Project B has a higher net present value than Project A. Statements A) and B) are correct. Statements A) and C) are correct. D. E.Explanation / Answer
30- Answer is E
statement A&C are correct
1- because IRR is a rate at which NPV is zero and IRR of A is 12% and B is 15% so at 10% discount rate both the project have positive cash flow
2-cost of capital of 13%, NPV of the project A would be negative as its IRR is 12% at which NPV is zero and at 13% NPV is negative while B IRR is 15% and at 13% discount rate NPV is positive.