Question Two:

(A)

What is the likely response by the stock market when a firm announces a positive NPV project? Is there

any reason to believe that this response might sometimes be negative?

(B)

The IRR of normal project X is greater than the IRR of normal project Y, and both IRR's are greater than

zero. (A normal project is defined as having a cash outflow in time 0 and cash inflows in all subsequent

periods). Also, the NPV of X is greater than the NPV of Y at the cost of capital. If the two projects are

mutually exclusive, Project X should definitely be selected, and the investment made, provided we have

confidence in the data. Put another way, it is impossible to draw NPV profiles that would suggest not accepting Project X.

(true/false/uncertain) Explain your answer.