CFA Level 1: Cost of Capital, Internal Rate of Return, and Project Evaluation

Cost of Capital and Internal Rate of Return Analysis

Prev Question Next Question

Question

Moynihan Motors has a cost of capital of 10.25 percent. The firm has two normal projects of equal risk. Project A has an internal rate of return of 14 percent, while

Project B has an internal rate of return of 12.25 percent. Which of the following statements is most correct?

Answers

A. If the crossover rate (i.e., the rate at which the Project's NPV profiles intersect) is 8 percent, Project A will have a lower net present value than Project B.

B. All of these answers are correct.

C. If the projects are mutually exclusive, the firm should always select Project A.

D. None of these answers are correct.

E. Both projects have a positive net present value.

Show Answer

Explanations

Click on the arrows to vote for the correct answer

A. B. C. D. E.

If the projects were independent, both should be accepted. They both have an IRR greater than the cost of capital, so they have positive NPVs. If the cost of capital were above 14%, both projects should be rejected. Project B will have a higher NPV at discount rates below 8% and Project A will have a higher NPV at discount rates above 8%.

Prev Question Next Question