NPV and project selection Answer: e Diff: E

16. Moynihan Motors has a cost of capital of 10.25 percent. The firm has two
normal projects of equal risk. Project A has an internal rate of return of
14 percent, while Project B has an internal rate of return of 12.25
percent. Which of the following statements is most correct?

a. Both projects have a positive net present value.

b. If the projects are mutually exclusive, the firm should always select
Project A.
c. If the crossover rate (that is, the rate at which the Project’s NPV
profiles intersect) is 8 percent, Project A will have a higher net
present value than Project B.
d. Statements a and b are correct.
e. Statements a and c are correct.

IRR Answer: b Diff: E

17. Project A has an IRR of 15 percent. Project B has an IRR of 18 percent. Both
projects have the same risk. Which of the following statements is most
correct?

a. If the WACC is 10 percent, both projects will have a positive NPV, and
the NPV of Project B will exceed the NPV of Project A.
b. If the WACC is 15 percent, the NPV of Project B will exceed the NPV of
Project A.
c. If the WACC is less than 18 percent, Project B will always have a
shorter payback than Project A.
d. If the WACC is greater than 18 percent, Project B will always have a
shorter payback than Project A.
e. If the WACC increases, the IRR of both projects will decline.

Post-audit Answer: d Diff: E 18. The post-audit is used to

a. Improve cash flow forecasts.

b. Stimulate management to improve operations and bring results into line
with forecasts.
c. Eliminate potentially profitable but risky projects.
d. Statements a and b are correct.
e. All of the statements above are correct.