You are considering the following two mutually exclusive projects. The required

Question

You are considering the following two mutually exclusive projects. The required rate of return is 14.6 percent for project A and 13.8 percent for project B. Which project should you accept and why?

Year     Project A     Project B

0         -$50,000     -$45,000

1            24,800         41,000

2            36,200        20,000

3            21,000        12,000

project A; because it has the higher required rate of return

project B; because it has the lower required return

project A; because it has the largest total cash inflow

project B; because it has the largest cash inflow in year one

project B; because its NPV is more than the NPV of project A

1.

project A; because it has the higher required rate of return

2.

project B; because it has the lower required return

3.

project A; because it has the largest total cash inflow

4.

project B; because it has the largest cash inflow in year one

5.

project B; because its NPV is more than the NPV of project A

Explanation / Answer

For A,

For B

The project should be selected in such a manner that it maximises shareholder's wealth which is determined through the net present value (NPV). Even though both projects have positive NPV, we can only select one project since the two projects are mutually exclusive. Thus, we have to choose the project with the higher NPV.

Thus, The Answer is Project B; because its NPV is more than the NPV of project A. (Option 5)

Year Cash Flow Discounted Cash Flow 0 -50000 -50000.00 1 24800 21640.49 2 36200 27563.82 3 21000 13952.93 NPV 13157.24 IRR 13.51%

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

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