Project A and Project B are mutually exclusive projects with equal risk. Both projects have an initial cash outflow followed by a series of cash inflows. Project A requires $1million in initial outlay, and has an internal rate of return of 13%, while Project B requires $ 800,000 in initial outlay, and has an internal rate of return of 15%. The two projects have the same net present value when the cost of capital is 7%. In other words, the crossover point is 7%. Which of the following statements is correct?

If the cost of capital is 10%, both projects will have a positive net present value.

If the cost of capital is 5%, Project B has a higher net present value than Project A.

If the cost of capital is 10%, Project B has a higher net present value than Project A.

A. I only

B. II only

C. III only

D. I&II only 

E. I&III only

Provide a clear and concise explanation, showing all your working 

Answer rating: 100% (QA)

The detailed answer for the above question is provided below The crossover point is the cost of capi... View the full answer