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. NCF $500 $400 $300 + + + $100 (1+0.1000) (1+0.1000)(1+0.1000) (1+0.10004 = $78.82 Project S: NPV = CF,+ EN TE = -$1,000+ Project L: NPV = CFo + EA COME = -$1,000+ $100 $300 + $400 $675 + + (1+0.1000) (1+0.1000) (1+0.1000) (1+0.1000) = $100.40 NPV ($) 500 400 300 S 200 100.40100 78.82 0 20 -100 Cost of Capital (%) 5. At a cost of capital less 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- 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