You are considering two independent projects with the following cash flows. The

Question

You are considering two independent projects with the following cash flows. The required return for both projects is 16 percent.

Given this information, which one of the following statements is correct?

a. You should accept Project A and reject Project B based on their respective NPVs.

b. You should accept Project B and reject Project A based on their respective NPVs.

c. You should accept Project A and reject Project B based on their respective IRRs.

d. You should accept Project B and reject Project A based on their respective IRRs.

e. You should accept both projects based on both the NPV and IRR decision rules.

Explanation / Answer

NPV A = -125,000 + 46,000 (P/F,i=16%,N=1) + 79,000 (P/F,i=16%,N=2) + 51,000 (P/F,i=16%,N=3)
NPV A = -125,000 + 46,000 (1+16%)1 + 79,000 (1+16%)2 + 51,000 (1+16%)3
NPV A = 6,038.6

NPV B = -135,000 + 50,000 (P/F,i=16%,N=1) + 30,000 (P/F,i=16%,N=2) + 110,000 (P/F,i=16%,N=3)
NPV B = -135,000 + 50,000 (1+16%)1 + 30,000 (1+16%)2 + 110,000 (1+16%)3  
NPV B = 870.7

*iRR is the interest rate at which the NPV is equal to 0. We need to use interpolation to calculate that interest rate. It is not neccesary to calculate those interest rates because it is obvious that they are higher than 16% (because the NPV are > 0). Based on calculation and concepts, this is the correct statement:
e. You should accept both projects based on both the NPV and IRR decision rules.

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.