Projects S and L both have an initial cost of $10,000, followed by a series of positive cash inflows
Projects S and L both have an initial cost of $10,000, followed by a series of positive cash inflows. Project S’s undiscounted net cash flows total $20,000, while L’s total undiscounted flows are $30,000. At a WACC of 10%, the two projects have identical NPVs. Which project’s NPV is more sensitive to changes in the WACC?
Both projects are equally sensitive to changes in the WACC since their NPVs are equal at all costs of capital.
Neither project is sensitive to changes in the discount rate, since both have NPV profiles that are horizontal.
The solution cannot be determined because the problem gives us no information that can be used to determine the projects’ relative IRRs.
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