Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

QUESTION 42 Clifford Company is choosing between two projects. The larger project has an initial cost of $100,000, annual cash flows of $30,000 for 5

QUESTION 42 Clifford Company is choosing between two projects. The larger project has an initial cost of $100,000, annual cash flows of $30,000 for 5 years, and an IRR of 15.24%. The smaller project has an initial cost of $50,000, annual cash flows of $16,000 for 5 years, and an IRR of 16.63%. The projects are equally risky. Which of the following statements is CORRECT? Since the smaller project has the higher IRR, the two projects NPV profiles will cross, and the larger project will look better based on the NPV at all positive values of WACC. If the company uses the NPV method, it will tend to favor smaller, shorter-term projects over larger, longer-term projects, regardless of how high or low the WACC is. Since the smaller project has the higher IRR but the larger project has the higher NPV at a zero discount rate, the two projects NPV profiles will cross, and the larger project will have the higher NPV if the WACC is less than the crossover rate. Since the smaller project has the higher IRR and the larger NPV at a zero discount rate, the two projects NPV profiles will cross, and the smaller project will look better if the WACC is less than the crossover rate. Since the smaller project has the higher IRR, the two projects NPV profiles cannot cross, and the smaller project's NPV will be higher at all positive values of WACC.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Digital Business And Electronic Commerce

Authors: Bernd W Wirtz

1st Edition

3030634817, 9783030634810

More Books

Students also viewed these Finance questions

Question

=+Show photos of consumers?

Answered: 1 week ago

Question

=+Exhibit children's artwork?

Answered: 1 week ago

Question

=+What kind of product or service would work in these locations?

Answered: 1 week ago