Lancaster Corp.is considering two equally risky, mutually exclusive projects, both of which have normal cash flows.Project A has an IRR of 11%, while Project B's IRR is 14%.When the cost of capital is 8%, the projects have the same NPV.Given this information, which of the following statements is CORRECT?
A) If the cost of capital is 9%, Project A's NPV will be higher than Project B's.
B) If the cost of capital is 6%, Project B's NPV will be higher than Project A's.
C) If the cost of capital is greater than 14%, Project A's IRR will exceed Project B's.
D) If the cost of capital is 9%, Project B's NPV will be higher than Project A's.
E) If the cost of capital is 13%, Project A's NPV will be higher than Project B's.

Question

Quizplus · Accepted Answer

At the cost of capital of 8%, the projects have the same NPV, so we cannot determine which project is better. However, when the cost of capital is 9%, Project A's NPV will decrease more than Project B's because Project A has a lower IRR. On the other hand, Project B's NPV will decrease less than Project A's because Project B has a higher IRR. Therefore, Project B will have a higher NPV at a cost of capital of 9%, making choice D the correct answer.