You are considering two mutually exclusive,equally risky,projects.Both have IRRs that exceed the WACC that is used to evaluate them.Which of the following statements is correct? Assume that the projects have normal cash flows,with one outflow followed by a series of inflows.
A)If the two projects' NPV profiles do not cross in the upper right quadrant, then there will be a sharp conflict as to which one should be selected.
B)If the cost of capital is greater than the crossover rate, then the IRR and the NPV criteria will not result in a conflict between the projects. One project will rank higher by both criteria.
C)For a conflict to exist between NPV and IRR, the initial investment cost of one project must exceed the cost of the other.
D)For a conflict to exist between NPV and IRR, one project must have an increasing stream of cash flows over time while the other has a decreasing stream. If both sets of cash flows are increasing or decreasing, then it would be impossible for a conflict to exist, even if one project is larger than the other.

Question

Quizplus · Accepted Answer

When the IRRs of both projects exceed the WACC, there is a possibility of a conflict between the IRR and NPV criteria. However, if the cost of capital is greater than the crossover rate (the point where the NPV profiles of both projects intersect), then the NPV criterion will rank one project higher than the other, resolving any conflict between the two criteria. Therefore, statement B is correct. Statements A, C, and D are incorrect because they either do not address the conflict between IRR and NPV or provide incorrect conditions for the conflict to exist.

You Are Considering Two Mutually Exclusive,equally Risky,projects