A B IRR 18% 27% NPV @ 10% $1,665 $1,601 Payback 7 years 4 years Profitability In

Question

A B
IRR 18% 27%
NPV @ 10% $1,665 $1,601

Payback 7 years 4 years

Profitability Index 1.67 2.00


Assuming the cash flows for projects A and B are normal (i.e., a series of negative cash flows is followed by a series of positive cash flows), which project should the firm accept and why?
a. Both A and B
b. A, but not B, because the IRR may have multiple solutions.
c. A, but not B, because A adds more value to the firm than B.
d. A, but not B, because A costs less than B.
e. A, but not B, because the appropriate re-investment rate assumption is more realistic for A than for B.
f. B, but not A, because B’s earlier payback will free up cash needed for other projects.
g. Answers C and E are the only correct answers
h. Answers C through F are all correct

Explanation / Answer

c. A, but not B, because A adds more value to the firm than B.

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