Projects A and B have the same expected lives and initial cash outflows. However, one project's cash flows are larger than in the early years, while the other project has larger cash flows in the later years. The two NPV profiles are given below: (diagram in the attached file).
Which of the following statements is most correct?
A) Project A has the smaller cash flows in the later years.
B) Project A has the larger cash flows in the later years.
C) We require information on the cost of capital in order to determine which project has the larger early cash flows.
D) The NPV profile graph is inconsistent with the statement made in the problem.
E) None of the statements above is correct.
Answer: D) The NPV profile graph is inconsistent with the statement made in the problem
We can ...
The solution discusses how the NPV changes with different discount rates.