A company is choosing between two projects.The larger project has an initial cost of $100,000,annual cash flows of $30,000 for 5 years,and an IRR of 15.24%.The smaller project has an initial cost of $50,000,annual cash flows of $16,000 for 5 years,and an IRR of 16.63%.The projects are equally risky.Which of the following statements is correct?
A)Since the smaller project has the higher IRR, the two projects' NPV profiles cannot cross, and the smaller project's NPV will be higher at all positive values of WACC.
B)Since the smaller project has the higher IRR, the two projects' NPV profiles will cross, and the larger project will look better based on the NPV at all positive values of WACC.
C)Since the smaller project has the higher IRR but the larger project has the higher NPV at a zero discount rate, the two projects' NPV profiles will cross, and the larger project will have the higher NPV if the WACC is less than the crossover rate.
D)Since the smaller project has the higher IRR and the larger NPV at a zero discount rate, the two projects' NPV profiles will cross, and the larger smaller project will look better if the WACC is less than the crossover rate.

Question

Quizplus · Accepted Answer

Since the smaller project has a higher IRR but the larger project has a higher NPV at a zero discount rate, the NPV profiles of the two projects will cross. The larger project will have a higher NPV if the discount rate is less than the crossover rate. Therefore, the larger project is a better choice at a lower WACC.

A Company Is Choosing Between Two Projects