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Projects S and L are equally risky, mutually exclusive, and have normal cash flows
Projects S and L are equally risky, mutually exclusive, and have normal cash flows. Project S has an IRR of 15%, while Project L's IRR is 12%. The two projects have the same NPV when the WACC is 7%. Which of the following statements is CORRECT?
| a. |
Project S's NPV is more sensitive to changes in WACC than Project L's. |
|
| b. |
If the WACC is 10%, Project S will have the higher NPV. |
|
| c. |
If the WACC is 6%, Project S will have the higher NPV. |
|
| d. |
If the WACC is 13%, Project S will have the lower NPV. |
|
| e. |
If the WACC is 10%, both projects will have a negative NPV. |
Expert Solution
The Correct answer is Option B
The Internal rate of return shows the average rate of return that project generates over the period of project and in case the project have Same NPV, then the Project with Higher WACC will have Higher NPV for that project
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