Chapter 10 - Page 6

Medium:
NPV profiles Answer: b Diff: M
19. Projects L and S each have an initial cost of $10,000, followed by a series
of positive cash inflows. Project L has total, undiscounted cash inflows
of $16,000, while S has total undiscounted inflows of $15,000. Further, at
a discount rate of 10 percent, the two projects have identical NPVs. Which
project’s NPV will be more sensitive to changes in the discount rate?

a. Project S.
b. Project L.
c. Both projects are equally sensitive to changes in the discount rate
since their NPVs are equal at all costs of capital.
d. Neither project is sensitive to changes in the discount rate, since
both have NPV profiles which are horizontal.
e. The solution cannot be determined unless the timing of the cash flows
is known.

NPV profiles Answer: a Diff: M

20. Two mutually exclusive projects each have
undiscounted cash flows for Project L are
cash flows for Project S total $13,000.
discount rate of 10 percent. Which of
describes this situation?
a cost of $10,000. The total,
$15,000, while the undiscounted
Their NPV profiles cross at a
the following statements best

a. The NPV and IRR methods will select the same project if the cost of
capital is greater than 10 percent; for example, 18 percent.
b. The NPV and IRR methods will select the same project if the cost of
capital is less than 10 percent; for example, 8 percent.
c. To determine if a ranking conflict will occur between the two projects
the cost of capital is needed as well as an additional piece of
information.
d. Project L should be selected at any cost of capital, because it has a
higher IRR.
e. Project S should be selected at any cost of capital, because it has a
higher IRR.

NPV profiles Answer: d Diff: M

21. A company is comparing two mutually exclusive projects with normal cash
flows. Project P has an IRR of 15 percent, while Project Q has an IRR of
20 percent. If the WACC is 10 percent, the two projects have the same NPV.
 Which of the following statements is most correct?

a. If the WACC is 12 percent, both projects would have a positive NPV. b.

If the WACC is 12 percent, Project Q would have a higher NPV than Project
P.
c. If the WACC is 8 percent, Project Q would have a lower NPV than Project
P. d. All of the statements above are correct.
e. None of the statements above is correct.

Chapter 10 - Page 7
NPV profiles Answer: d Diff: M
22. Project C and Project D are two mutually exclusive projects with normal cash
flows and the same risk. If the WACC were equal to 10 percent, the two
projects would have the same positive NPV. However, if the WACC is less
than 10 percent, Project C has a higher NPV, whereas if the WACC is
greater than 10 percent, Project D has a higher NPV. On the basis of this
information, which of the following statements is most correct?

a. Project D has a higher IRR, regardless of the cost of capital. b. If

the WACC is less than 10 percent, Project C has a higher IRR. c. If the
WACC is less than 10 percent, Project D’s MIRR is less than its IRR.
d. Statements a and c are correct.
e. None of the statements above is correct.

NPV profiles Answer: e Diff: M N

23. Project X and Project Y each have normal cash flows (an up-front cost
followed by a series of positive cash flows) and the same level of risk.
Project X has an IRR equal to 12 percent, and Project Y has an IRR equal
to 14 percent. If the WACC for both projects equals 9 percent, Project X
has a higher net present value than Project Y. Which of the following
statements is most correct?

a. If the WACC equals 13 percent, Project X will have a negative NPV,

while Project Y will have a positive NPV.
b. Project X probably has a quicker payback than Project Y.
c. The crossover rate in which the two projects have the same NPV is
greater than 9 percent and less than 12 percent.