Lancaster corp. is considering two equally risky, mutually exclusive projects, both of which have normal cash flows. project a has an irr of 11%, while project b's irr is 14%. when the cost of capital is 8%, the projects have the same npv. given this information, which of the following statements is correct? a. if the cost of capital is 9%, project a's npv will be higher than project b's. b. if the cost of capital is 6%, project b's npv will be higher than project a's. c. if the cost of capital is greater than 14%, project a's irr will exceed project b's. d. if the cost of capital is 9%, project b's npv will be higher than project a's. e. if the cost of capital is 13%, project a's npv will be higher than project b's.

Explanation:

IRR is the discount rate point where NPV equal to 0. Given, both projects have same NPV at 8%, when discount rate is higher than 8%, NPV of project A will decrease faster than that of project B because project A's IRR is lower than project B's IRR. When discount rate is lower than 8%, NPV of project A will increase faster than project B's.

We will go through each of the answer options:

A. If the cost of capital is 9%, Project A's NPV will be higher than Project B's. False

Explaination: Cost of capital here is higher than 8%, NPV of project A will be lower than that of project B.

B. If the cost of capital is 6%, Project B's NPV will be higher than Project A's. False

Explaination:

C. If the cost of capital is greater than 14%, Project A's IRR will exceed Project B's. False

Explaination: IRR is dependent on pattern of cashflows rather than cost of capital.

D. If the cost of capital is 9%, Project B's NPV will be higher than Project A's. True

Explaination: This is an opposite answer to option A.

E. If the cost of capital is 13%, Project A's NPV will be higher than Project B's. False

Explaination: When the cost of capital is 13%, NPV of project A is negative and NPV of project B is positive.

a. money supply  

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