Consider projects S and L.Both have normal cash flows,and the projects have the same risk,hence both are evaluated with the same WACC,10%.However,S has a higher IRR than L.Which of the following statements is CORRECT?
A) If Project S has a positive NPV, Project L must also have a positive NPV.
B) If the WACC falls, each project's IRR will increase.
C) If the WACC increases, each project's IRR will decrease.
D) If Projects S and L have the same NPV at the current WACC, 10%, then Project L, the one with the lower IRR, would have a higher NPV if the WACC used to evaluate the projects declined.
E) Project S must have a higher NPV than Project L.

Question

Quizplus · Accepted Answer

Refer to the NPV profile below.Statement a is false,because if the WACC is greater than IRR_L but less than IRR_S then Project S will have a positive NPV and Project L's NPV will be negative.Statements b and c are false,because IRR is independent of WACC.Statement d is true,because Project S has the higher IRR,so Project L's NPV profile is above Project S's when the WACC is less than the crossover rate.Statement e is false,because you do not know which project has the higher NPV unless you know the WACC. 11ea42d0_c08c_438f_9abf_516708f40bbf_TB2090_00

Consider Projects S and L