Projects A and B have identical expected lives and identical initial cash outflows (costs).However,most of one project's cash flows come in the early years,while most of the other project's cash flows occur in the later years.The two NPV profiles are given below:
Which of the following statements is CORRECT?
A) More of Project B's cash flows occur in the later years.
B) We must have information on the cost of capital in order to determine which project has the larger early cash flows.
C) The NPV profile graph is inconsistent with the statement made in the problem.
D) The crossover rate,i.e. ,the rate at which Projects A and B have the same NPV,is greater than either project's IRR.
E) More of Project A's cash flows occur in the later years.

Question

Projects A and B have identical expected lives and identical initial cash outflows (costs).However,most of one project's cash flows come in the early years,while most of the other project's cash flows occur in the later years.The two NPV profiles are given below: 
Which of the following statements is CORRECT?
A) More of Project B's cash flows occur in the later years. 
B) We must have information on the cost of capital in order to determine which project has the larger early cash flows. 
C) The NPV profile graph is inconsistent with the statement made in the problem. 
D) The crossover rate,i.e. ,the rate at which Projects A and B have the same NPV,is greater than either project's IRR. 
E) More of Project A's cash flows occur in the later years.

Quizplus · Accepted Answer

The NPV profile for Project A shows a higher NPV in the later years, indicating that more of its cash flows occur in the later years. The statement in option B is incorrect because the information on cost of capital is not required to determine which project has the larger early cash flows. Option C is incorrect because the NPV profile is consistent with the statement in the problem. Option D cannot be determined from the information given in the problem.

Projects a and B Have Identical Expected Lives and Identical