Asked by
Valeria Lozano
on Nov 28, 2024
Verified
Projects A and B are mutually exclusive and have normal cash flows.Project A has an IRR of 15% and Project B's IRR is 20%.The company's WACC is 12%,and at that rate Project A has the higher NPV.Which of the following statements is correct?
A) The crossover rate for the two projects must be less than 12%.
B) Assuming the timing pattern of the two projects' cash flows is the same, Project B probably has a higher cost (and larger scale) .
C) Assuming the two projects have the same scale, Project B probably has a faster payback than Project A.
D) Since B has the higher IRR, then it must also have the higher NPV if the crossover rate is less than the WACC of 12%.
Mutually Exclusive
Situations or choices where the selection of one option precludes the selection of another, often used in decision-making processes.
Crossover Rate
The point at which two projects have the same net present values and discounted cash flows, used in assessing investment options.
- Discover the crossover rate and appreciate its role in evaluating mutually exclusive projects.
- Familiarize yourself with the Internal Rate of Return (IRR) and Modified Internal Rate of Return (MIRR) as mechanisms for evaluating projects.
Verified Answer
KL
Learning Objectives
- Discover the crossover rate and appreciate its role in evaluating mutually exclusive projects.
- Familiarize yourself with the Internal Rate of Return (IRR) and Modified Internal Rate of Return (MIRR) as mechanisms for evaluating projects.