You are considering two mutually exclusive projects with the following cash flows. Will your choice between the two projects differ if the required rate of return is $8 \%$ rather than $11 \%$ ? If so, what should you do?

A)yes; Select A at 8% and B at 11%.
B)yes; Select B at 8% and A at 11%.
C)yes; Select A at 8% and select neither at 11%.
D)no; Regardless of the required rate, project A always has the higher NPV.
E)no; Regardless of the required rate, project B always has the higher NPV.

Question

You are considering two mutually exclusive projects with the following cash flows. Will your choice between the two projects differ if the required rate of return is $8 \%$ rather than $11 \%$ ? If so, what should you do?

A)yes; Select A at 8% and B at 11%. 
B)yes; Select B at 8% and A at 11%. 
C)yes; Select A at 8% and select neither at 11%. 
D)no; Regardless of the required rate, project A always has the higher NPV. 
E)no; Regardless of the required rate, project B always has the higher NPV.

Quizplus · Accepted Answer

To determine which project is best, we need to calculate the net present value (NPV) of each project at both the 8% and 11% required rates of return.

At a required rate of 8%, the NPV of Project A is:

$1,000 - $750/(1 + 0.08) = $319.44

The NPV of Project B is:

$900 - $800/(1 + 0.08) = $62.50

Therefore, we should select Project A at a required rate of 8%.

At a required rate of 11%, the NPV of Project A is:

$1,000 - $750/(1 + 0.11) = $230.89

The NPV of Project B is:

$900 - $800/(1 + 0.11) = $71.90

Therefore, at a required rate of 11%, we should select Project B.

Since our choice between the two projects does differ depending on the required rate of return, the correct answer is A.

You Are Considering Two Mutually Exclusive Projects with the Following 8%8 \%8%

You Are Considering Two Mutually Exclusive Projects with the Following $8 \%$