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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
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, $100, $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, $300, 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 the two projects. CF Project S: NPV = CF + -$1,000+ 1 $500 (1+0.1000) 1 $400 - (1+0.1000)2 $300 (1+0.1000) cov + 7 (1+0.1000)+ 100044 = $78.82 DIO 1+r) Proiect L: NPV = CFO + 1 $675 5 + =-$1,000 + (1+0 1000) + (1+0 1000)21 (1+0 100013 $100 $300 $400 (1+0.1000 (1+0 100014 NPV ($) 100.40100+- 78.82 15 20 -100- Cost of Capital (%) d. There is no special name for this point -Select- 5. At a cost of capital less than the point at which they cross, which project will have the higher NPV? a. Project S b. Project L c. Project S and L will have the same NPV d. Cannot determine -Select- 6. At a cost of capital greater than the point at which they cross, which project will have the higher NPV? a. Projects b. Project L c. Project S and L will have the same NPV d. Cannot determine -Select- 7. 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 a. Project S is the better project because it has the higher IRR. b. Project L is the better project because it has the higher NPV. c. It depends because there is a conflict between IRR and NPV. -Select- 8. If the cost of capital was greater than the point at which the two projected NPVs are equal, then a. It depends because there is a conflict between IRR and NPV. b. There is no conflict because Project S has both a higher NPV and a higher IRR than Project L. c. There is no conflict because Project L has both a higher NPV and a higher IRR than Project S. -Select
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