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Year 0 Year 1 Year 2 Year 3 Year 4 Cashflow for S -100 40 50 30 30 Cashflow for L -100 10 10 50
Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | |
Cashflow for S | -100 | 40 | 50 | 30 | 30 |
Cashflow for L | -100 | 10 | 10 | 50 | 90 |
WACC | NPV(S) | NPV(L) |
5% | ||
10% | ||
15% | ||
20% | ||
25% |
Which of the following statements is correct? (Hint: complete the NPV profile)
a. The crossover rate should be larger that 20%
b. The crossover rate should be smaller that 5%
c. The crossover rate should be between 5% and 10%
d. If the WACC is smaller than the crossover rate, you will choose project S using the NPV method
e. If the WACC is larger than the crossover rate, a conflict arises between the NPV and the IRR methods
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