Suppose your firm is considering two mutually exclusive, required projects with

Question

Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown below. The required rate of return on projects of both of their risk class is 10 percent. Project A s Cash flow from year 0 to year 3: -1000, 400, 400, 700. Project B s Cash flow from year 0 to year 3: -500, 200, 300, 300.

Which statement is correct?

Accept A, reject B, because B has lower IRR

Reject A, accept B, because B has higher IRR

Accept A, reject B, because A has higher NPV

Reject A, accept B, because B has higher NPV

Accept A, reject B, because B has lower IRR

Reject A, accept B, because B has higher IRR

Accept A, reject B, because A has higher NPV

Reject A, accept B, because B has higher NPV

Explanation / Answer

Project A IRR=21.56%

IRR =26.57%

Reject A, accept B, because B has higher IRR

Accept A, reject B, because A has higher NPV

Project A Year Cash Flow PVF @ 10% PV 0 -1000 1.00 -1,000.00 1 400 0.91 363.64 2 400 0.83 330.58 3 700 0.75 525.92 NPV 220.14

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