Two mutually exclusive projects each have a cost of $10,000.The total, undiscounted cash flows from Project L are $15,000, while the undiscounted cash flows from Project S total $13,000.Their NPV profiles cross at a discount rate of 10 percent.Which of the following statements best describes this situation?
A)The NPV and IRR methods will select the same project if the required rate of return is greater than 10 percent; for example, 18 percent.
B)The NPV and IRR methods will select the same project if the cost of capital is less than 10 percent; for example, 8 percent.
C)To determine if a ranking conflict will occur between the two projects the required rate of return is needed as well as an additional piece of information.
D)Project L should be selected at any required rate of return, because it has a higher IRR.
E)Project S should be selected at any required rate of return, because it has a higher IRR.

Question

Quizplus · Accepted Answer

When the required rate of return is greater than the crossover rate of 10%, the NPV and IRR methods will select the same project, which is the one with the higher IRR.

Two Mutually Exclusive Projects Each Have a Cost of $10,000