You are considering two mutually exclusive,equally risky,projects.Both have IRRs that exceed the WACC.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,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) If the cost of capital is less 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.
D) For a conflict to exist between NPV and IRR,the initial investment cost of one project must exceed the cost of the other.
E) 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

Again,it is useful to draw NPV profiles that fit the description given in the question.Any numbers that meet the criteria will do.
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Statement a is false,because if the profiles do not cross,then one will dominate the other,with both a higher IRR and a higher NPV at every discount rate.Statement b is true.Statement c is false.Statement d is false because a conflict can result from differences in the timing of the cash flows.Statement e is false because scale differences can result in profile crossovers and thus conflicts.

You Are Considering Two Mutually Exclusive,equally Risky,projects