Question

Consider two projects, X and Y. Project X's IRR is 19% and Project Y's IRR is 17%. The projects have the same risk and the same lives, and each has constant cash flows during each year of their lives. If the cost of capital is 10%, Project Y has a higher NPV than X. Given this information, which of the following statements is CORRECT? (Hint: it is useful to draw NPV profiles)

		The crossover rate must be less than 10%.
		If the cost of capital is 9%, Project Y will have the lower NPV.
		If the cost of capital is 18%, Project X will have the higher NPV.
		Project X is larger in the sense that it has the higher initial cost.
		If the cost of capital is 9%, Project X will have the lower IRR.

Answer 1

Option C If the cost of capital is 18%, Project X will have the higher NPV.

The crossover rate must be less than 10% is false because the crossover must be higher than 10% to reduce the Higher NPV of Project Y.

If the cost of capital is 9%, Project Y will have the lower NPV.-Already Project Y has higher NPV so it wont get lower

Project X is larger in the sense that it has the higher initial cost.-Not ascertainable

If the cost of capital is 9%, Project X will have the lower IRR.-IRR is a constant term it won't change