You must show all of your work You are reviewing two new projects: A and B. Both

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You must show all of your work

You are reviewing two new projects: A and B. Both have conventional cash flows. They will compete for the same resources so you can choose at most one of them. You require an annual return of 10% for project A. Project B is riskier so you require a higher return, 13% per year. The IRR of project A is 11% and the IRR of project B is 18%. Project A requires an investment of $440 and project B requires $552. The net present value of project A is $301 while the net present value of project B is $291. Assume you have sufficient funding's to invest. a. If you apply the NPV rule, will you choose project A. project B. or both, or neither of them? b. If you apply the IRR rule, will you choose project A. project B, or both. or neither of them? c. Which investment criterion (NPV rule or IRR rule) is more appropriate in this case? State your reason(s).

Explanation / Answer

Since NPV of Project A is higher, I would choose project A. As the IRR of project B is higher and it is above the required return, I would certainly choose project B. Since this is a mutually exclusive project, NPV is a better criterion to choose projects.

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