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Alpha (A) and Bravo (B) are of the same length and have identical investment at time zero
Alpha (A) and Bravo (B) are of the same length and have identical investment at time zero. However, the majority of one project's cashflows come in the early years, while the majority of the other project's cash flows occur in the later years. The two NPV profiles are given below: NPV ($) A B r () Which of the following statements is CORRECT? Select one: O a. The crossover rate is greater than either project's IRR. O b. More information on the cost of capital is necessary in order to determine which project has the larger early cash flows. O c. The majority of Project Bravo's cash flows occur in the later years. O d. The NPV profile graph is not consistent with the information given in the problem. O e. The majority of Project Alpha's cash flows occur in the later years.
Expert Solution
E. The majority of the Project Alpha’s cash flows occur in the later years
In the given case , both the Project A & B have the same initial investment as stated in the problem .
From the graph as can be seen from the X axis of the graph
· IRR of the projects can be seen from the intercept in the X axis
· So IRR of B > IRR A
· The project having the Higher IRR have the more early cash flows and are profitable than the other project
Since Project A IRR is lesser than project B , hence cash flows of project A occurred at a later years than that of other .
Cross over rate for both the projects is lesser than IRRs as can be seen from the graph ,so 1 is false , Also Cost of capital info is not necessary as at the crossover NPV the decision reverses and the interpretation can be directly done from the IRR .
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