1. The cost of capital for two mutually exclusive projects that are being considered is 12%. Project K has an IRR of 20% while Project R's IRR is 15%. The projects have the same NPV at the 12% current cost of capital. Interest rates are currently high. However, you believe that money costs and thus your cost of capital will soon decline. You also think that the projects will not be funded until the cost of capital has decreased, and their cash flows will not be affected by the change in economic conditions. Under these conditions, which of the following statements is CORRECT?
A. You should delay a decision until you have more information on the projects, even if this means that a competitor might come in and capture this market.
B. You should recommend Project R, because at the new cost of capital it will have the higher NPV.
C. You should recommend Project K, because at the new cost of capital it will have the higher NPV.
D. You should recommend Project R because it will have both a higher IRR and a higher NPV under the new conditions. E. You should reject both projects because they will both have negative NPVs under the new conditions.
2. Projects C and D both have normal cash flows and are mutually exclusive. Project C has a higher NPV than Project D at any cost of capital greater than zero. If the cost of capital is 13% for these projects, then you should
A. Only pick Project C after making sure it's IRR is also greater than Project D's IRR
B. Check make sure that NPV, IRR and MIRR of C is greater than the respective values for Project D.
C. Pick Project C based solely on NPV; other words discontinue additional computation.
D. Pick Project D based on higher IRR than Project C's IRR. E. None of the above.