CFA Practice Question

CFA Practice Question

Normal projects C and D are mutually exclusive. Project C has a higher net present value if the WACC is less than 12 percent, whereas Project D has a higher net present value if the WACC exceeds 12 percent. Which of the following statements is the most correct?
A. Project C probably has a faster payback.
B. Project D is probably larger in scale than Project C.
C. Project D has a higher internal rate of return.
Explanation: From the information given, D has the higher IRR. The project's scale cannot be determined from the information given. As C's NPV declines more rapidly with an increase in rates, this implies that more of the cash flows are coming later on. So C would have a slower payback than D.

User Contributed Comments 4

User Comment
humphrey if IRR of both projects less than 12%, C has higher IRR, if IRR both greater than 12%, D has higher. this can be seen from the NPV profiles of the two projects, with the curves cross at 12% of discount rate
humphrey ... I take it back, for mutually exclusive projects, when WACC > cross over rate, NPV agrees with IRR, when WACC < cross over rate, NPV disagree with IRR, therefore, IRR of D is larger in either case.
pstebelp thanks humphrey!
ConnerVP1 This is only true if we assume C&D are positive NPV at 12% or negative NPV at 12%. If they are both 0 NPV at 12% WACC, then their IRR is the same (12% IRR). However, if we assume NPV is positive at 12% WACC, then IRR is higher for D. Correct me if I'm wrong...
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