Projects A and B have the same expected lives and initial cash outflows. However, one project's cash flows are larger in the early years, while the other project has larger cash flows in the later years. The two NPV profiles are given below: Which of the following statements is most correct?
A) Project A has the smaller cash flows in the later years.
B) Project A has the larger cash flows in the later years.
C) We require information on the cost of capital in order to determine which project has larger early cash flows.
D) The NPV profile graph is inconsistent with the statement made in the problem.
E) None of the statements above is correct.

Question

Quizplus · Accepted Answer

The NPV profile for Project A is lower initially and then increases, indicating smaller cash flows in the early years and larger cash flows in the later years. Therefore, statement A is incorrect. The NPV profile for Project B is higher initially and then decreases, indicating larger cash flows in the early years and smaller cash flows in the later years. Therefore, statement B is correct. Statement C is incorrect because we can determine which project has larger early cash flows by analyzing the NPV profile. Statement D is incorrect because the NPV profile is consistent with the information given in the problem. Therefore, the correct answer is B.

Projects a and B Have the Same Expected Lives and Initial