Projects S and L both have normal cash flows, and the projects have the same risk, hence both are evaluated with the same WACC,
10%. However, S has a higher IRR than L. Which of the following statements is CORRECT? A. Project S must have a higher NPV than Project L.
B. If Project S has a positive NPV, Project L must also have a positive NPV.
C. If the WACC falls, each project's IRR will increase.
D. If the WACC increases, each project's IRR will decrease.
E. If Projects S and L have the same NPV at the current WACC, 10%, then Project L, the one with the lower IRR, would have a higher NPV if the WACC used to evaluate the projects declined.
E. If Projects S and L have the same NPV at the current WACC, 10%, then Project L, the one with the lower IRR, would have a higher NPV if the WACC used to evaluate the projects declined.
Explanation:
Net present value is the present value of after tax cash flows from an investment less the amount invested.
Internal rate of return is the discount rate that equates the after tax cash flows from an investment to the amount invested
This example illustrates INSIGHT. A person is said to have an insight when a solution to a problem present itself to him or occur to him suddenly. Insight refers to the sudden discovery of a perfect solution after trying unsuccessfully to fix a problem.
