Project A and Project B are mutually exclusive projects with equal risk. Project A has an internal rate of return of 12 percent, while Project B has an internal rate of return of 15 percent. The two projects have the same net present value when the cost of capital is 7 percent. In other words, the crossover rate is 7 percent. Assume each project has an initial cash outflow followed by a series of inflows. Which of the following statements is most correct?
a. If the cost of capital is 10 percent, each project will have a postivie net present value.
b. If the cost of capital is 6 percent, Project B has a higher net present value than project A.
c. If the cost of capital is 13 percent, Project B has a higher net present value than Project A.
d. Statements a and b are correct.
e. All of the statements above are correct. hide problem
We can answer this based on NPV profile which is in the attached file.
a. This is correct since the IRR for both is more ...
The solution explains how to select the correct alternative relating to NPV