Projects S and L are equally risky,mutually exclusive,and have normal cash flows.Project S has an IRR of 15%,while Project L's IRR is 12%.The two projects have the same NPV when the WACC is 7%.Which of the following statements is CORRECT?
A) If the WACC is 6%, Project S will have the higher NPV.
B) If the WACC is 13%, Project S will have the lower NPV.
C) If the WACC is 10%, both projects will have a negative NPV.
D) Project S's NPV is more sensitive to changes in WACC than Project L's.
E) If the WACC is 10%, both projects will have positive NPVs.

Question

Quizplus · Accepted Answer

The easiest way to think about this question is to begin by drawing an NPV profile as shown below,then using it to decide which statement is correct. 11ea42d0_c08b_5929_9abf_6df6917797d7_TB2090_00 Statement e is true,because both projects have an IRR greater than the WACC and thus will have a positive NPV.Statement a is false,because at 6%,the WACC is less than the crossover rate and Project L has a higher NPV than S.Statement b is false,because at 13% the WACC is greater than the crossover rate and S would have a higher NPV than L.Statement c is false,because of reasons mentioned in statement a.Statement d is false,because Project L's NPV profile is steeper,which means Project L's NPV is more sensitive to changes in WACC than Project S's NPV.

Projects S and L Are Equally Risky,mutually Exclusive,and Have Normal