1a What is the approximate cost of capital for which the two cash flows are about equal 10 12 13 5 14 5 1b What is the approximate internal rate of return (IRR) for the Project L cash flow 10 12 13 5 14 5 1c What is the approximate internal rate of return (IRR) for the Project S cash flow 10 12 13 5 14 5 1d What is the name for the point at which the two projects' NPVs are equal Inflection point Equal NPV rate Crossover rate There is no special name for this point 1e At a cost of capital less than the point at which they cross, which project will have the higher NPV Project S Project L Project S and L will have the same NPV Cannot determine 1f At a cost of capital greater than the point at which they cross, which project will have the higher NPV Project S Project L Project S and L will have the same NPV Cannot determine 1g The internal rate of return (IRR) is the point at which a project's NPV equals 0 If the cost of capital were 5 (move the slider so that is the case), then Project S is the better project because it has the higher IRR Project L is the better project because it has the higher NPV It depends because there is a conflict between IRR and NPV 1h If the cost of capital was greater than the point at which the two projected NPVs are equal, then It depends because there is a conflict between IRR and NPV There is no conflict because Project S has both a higher NPV and a higher IRR than Project L There is no conflict because Project L has both a higher NPV and a higher IRR than Project S Cost of Capital Comparison Conceptual Overview Explore how the timing and size of cash flows affect the net present values of two alternative investments The blue curve (labeled L ) depicts the NPV for a project with larger cash flows later of $1,000, 5100, $300, $400, and $675 The red curve (labeled S ) depicts the NPV for a project with larger cash flows sooner of $1,000, $500, $400, 5300, and $100 Drag on the graph either left or right to change the cost of capital interest rate at which the NPV is evaluated for two projects $500 $400 $300 $100 (1 (1 0 1000)T(1 0 1000) (1 0 1000) (1 0 1000) $78 82 Project L NPV CF0 EN C $1,000 $100 $300 $400 (1 0 1000)(1 0 1000) (1 0 1000) (1 0 100074 $100 40 $675 NPV (S) 500 400 L 300 S 200 100 40100 78 82 0 5 20 100 Cost of Capital ( )

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1a. What is the approximate cost of capital for which the two cash flows are about equal? 10% 12% 13.5% 14.5% 1b. What is the

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1a. What is the approximate cost of capital for which the two cash flows are about equal?

10%
12%
13.5%
14.5%

1b. What is the approximate internal rate of return (IRR) for the Project L cash flow?

10%
12%
13.5%
14.5%

1c. What is the approximate internal rate of return (IRR) for the Project S cash flow?

10%
12%
13.5%
14.5%

1d. What is the name for the point at which the two projects' NPVs are equal?

Inflection point
Equal NPV rate
Crossover rate
There is no special name for this point

1e. At a cost of capital less than the point at which they cross, which project will have the higher NPV?

Project S
Project L
Project S and L will have the same NPV
Cannot determine

1f. At a cost of capital greater than the point at which they cross, which project will have the higher NPV?

Project S
Project L
Project S and L will have the same NPV
Cannot determine

1g. The internal rate of return (IRR) is the point at which a project's NPV equals 0. If the cost of capital were 5% (move the slider so that is the case), then

Project S is the better project because it has the higher IRR.
Project L is the better project because it has the higher NPV.
It depends because there is a conflict between IRR and NPV.

1h. If the cost of capital was greater than the point at which the two projected NPVs are equal, then

It depends because there is a conflict between IRR and NPV.
There is no conflict because Project S has both a higher NPV and a higher IRR than Project L.
There is no conflict because Project L has both a higher NPV and a higher IRR than Project S.

Cost of Capital Comparison Conceptual Overview: Explore how the timing and size of cash flows affect the net present values of two alternative investments. The blue curve (labeled "L") depicts the NPV for a project with larger cash flows later of - $1,000, 5100, $300, $400, and $675. The red curve (labeled "S") depicts the NPV for a project with larger cash flows sooner of -$1,000, $500, $400, 5300, and $100. Drag on the graph either left or right to change the cost of capital interest rate at which the NPV is evaluated for two projects. + $500 $400 $300 $100 (1+ (1+0.1000)T(1+0.1000)*(1+0.1000)*(1+0.1000)* = $78.82 - + + + Project L: NPV = CF0 + + EN C=-$1,000+ $100 $300 + $400 (1+0.1000)(1+0.1000)- (1+0.1000)*(1+0.100074 = $100.40 $675 NPV (S) 500 400 L 300 S 200 100.40100 78.82 0 5 20 -100- Cost of Capital (%)