Projects S and L both have normal cash flows, and the projects have the same ris

Question

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.

Explanation / Answer

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.

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