Isaac has analyzed two mutually exclusive projects that have 3-year lives. Project A has an NPV of $81,406, a payback period of 2.48 years, and an AAR of 9.31 percent. Project B has an NPV of $82,909, a payback period of 2.57 years, and an AAR of 9.22 percent. The required return for Project A is 11.5 percent while it is 12 percent for Project B. Both projects have a required AAR of 9.25 percent. Isaac must make a recommendation and justify it in 15 words or less. What should his recommendation be?
A) Accept both projects because both NPVs are positive
B) Accept Project A because it has the shortest payback period
C) Accept Project B and reject Project A based on the NPVs
D) Accept Project A and reject Project B based on their AARs
E) Accept Project A because it has the lower required return

Question

Isaac has analyzed two mutually exclusive projects that have 3-year lives. Project A has an NPV of $81,406, a payback period of 2.48 years, and an AAR of 9.31 percent. Project B has an NPV of $82,909, a payback period of 2.57 years, and an AAR of 9.22 percent. The required return for Project A is 11.5 percent while it is 12 percent for Project B. Both projects have a required AAR of 9.25 percent. Isaac must make a recommendation and justify it in 15 words or less. What should his recommendation be? 
A) Accept both projects because both NPVs are positive 
B) Accept Project A because it has the shortest payback period 
C) Accept Project B and reject Project A based on the NPVs 
D) Accept Project A and reject Project B based on their AARs 
E) Accept Project A because it has the lower required return

Quizplus · Accepted Answer

Project B has the higher NPV, making it the better choice among mutually exclusive projects.

Isaac Has Analyzed Two Mutually Exclusive Projects That Have 3-Year