Projects A and B are mutually exclusive and have normal cash flows.Project A has an IRR of 15% and B's IRR is 20%.The company's WACC is 12%,and at that rate Project A has the higher NPV.Which of the following statements is CORRECT?
A) Assuming the timing pattern of the two projects' cash flows is the same, Project B probably has a higher cost (and larger scale).
B) Assuming the two projects have the same scale, Project B probably has a faster payback than Project A.
C) The crossover rate for the two projects must be 12%.
D) Since B has the higher IRR, then it must also have the higher NPV if the crossover rate is less than the WACC of 12%.
E) The crossover rate for the two projects must be less than 12%.

Question

Quizplus · Accepted Answer

Consider the following NPV profile graph:
 11ea42d0_c08c_91b2_9abf_8b1b1cd4c444_TB2090_00 We can see that statements c,d,and e are incorrect.Statement a is also incorrect,because if the projects have the same timing pattern,then A must have the higher cost.That leaves statement b as being correct,and that conclusion is confirmed by noting that since A have the steeper slope,its cash flows must come in slower; hence,B's cash flows come in more quickly and thus has the faster payback.

Projects a and B Are Mutually Exclusive and Have Normal