The Commodore Co. is trying to decide between the following two mutually exclusive projects: The only requirement the company has is that any project that is accepted must produce a minimum rate of return of 11%. What should the company do and why?
A) Both projects should be accepted because their payback periods are only about 2 years.
B) Both projects should be accepted because they have IRRs of 22.87% and 28.45%, which exceed the 11% requirement.
C) Both projects should be accepted because they both have positive NPVs.
D) Project I should be accepted because it has an NPV of $3,908.58. Project II cannot also be accepted.
E) Project II should be accepted because it has an IRR of 28.45%, which is greater than Project I's IRR.

Question

The Commodore Co. is trying to decide between the following two mutually exclusive projects:  The only requirement the company has is that any project that is accepted must produce a minimum rate of return of 11%. What should the company do and why?
A) Both projects should be accepted because their payback periods are only about 2 years. 
B) Both projects should be accepted because they have IRRs of 22.87% and 28.45%, which exceed the 11% requirement. 
C) Both projects should be accepted because they both have positive NPVs. 
D) Project I should be accepted because it has an NPV of $3,908.58. Project II cannot also be accepted. 
E) Project II should be accepted because it has an IRR of 28.45%, which is greater than Project I's IRR.

Quizplus · Accepted Answer

The company's only requirement is that the project must produce a minimum rate of return of 11%. Both projects exceed this requirement with IRRs of 22.87% and 28.45%. However, the NPV is a better indicator of the project's profitability. Project I has an NPV of $3,908.58 while Project II has a negative NPV. Therefore, only Project I should be accepted as it meets both the rate of return requirement and has a positive NPV.