2. Projects A and B have identical expected lives and identical initial cash out

Question

2. Projects A and B have identical expected lives and identical initial cash outflows (costs). However, most of one projects cash flows come in the early years, while most of the other projects cash flows occur in the later years. The two NPV profiles are given below:

Which of the following statements is CORRECT?
a. More of Project As cash flows occur in the later years.
b. More of Project Bs cash flows occur in the later years.
c. We must have information on the cost of capital in order to determine which project has the larger early cash flows.
d. The NPV profile graph is inconsistent with the statement made in the problem.
e. The crossover rate, i.e., the rate at which Projects A and B have the same NPV, is greater than either projects

Explanation / Answer

A. More of Project A's cash flows occur in the later years

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