Question
Project A and Project B are mutually exclusive projects with equal risk. Both projects have an initial cash outflow followed by a series of cash
Project A and Project B are mutually exclusive projects with equal risk. Both projects have an initial cash outflow followed by a series of cash inflows. Project A requires $1million in initial outlay, and has an internal rate of return of 13%, while Project B requires $ 800,000 in initial outlay, and has an internal rate of return of 15%. The two projects have the same net present value when the cost of capital is 7%. In other words, the crossover point is 7%. Which of the following statements is correct?
If the cost of capital is 10%, both projects will have a positive net present value.
If the cost of capital is 5%, Project B has a higher net present value than Project A.
If the cost of capital is 10%, Project B has a higher net present value than Project A.
A. I only
B. II only
C. III only
D. I&II only
E. I&III only
Provide a clear and concise explanation, showing all your working
Step by Step Solution
There are 3 Steps involved in it
Step: 1
The detailed answer for the above question is provided below The crossover point is the cost of capi...Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started