Two of the company \'s projects A and B have the same expected lives and initial

Question

Two of the company 's projects A and B have the same expected lives and initial cash outflows However, one project's cash flows are larger in the early years, while the other project has larger cash flows in the later years. The two NPV profiles are given below: Which of the following statements is most correct? a. Project A has the smaller cash flows in the later years. b. Project A has the larger cash flows in the later years. c We require information on the cost of capital in order to determine which project has larger early cash flows. d. The NPV profile graph is inconsistent with the statement made in the problem. e. None of the statements abeve is correct.

Explanation / Answer

Correct option is "a"Project A has smaller cash flow in later years .

Since Project A has higher NPV than project B ,it means the cash flow of project A is higher in initial years and lower in later years .

NPV =present value of cash flow -initial investment

Both project have same initial ivestment so it means they differ in present value of cash flow terms .since present value of project A is higher in initial years ,it will be lower in later years .

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