A division manager is choosing between two mutually exclusive projects. The company requires any project to earn at least 12%. The manager believes that cash inflows from the project can be reinvested at the rate of 12%. Which project will the manager likely choose?

Question

A division manager is choosing between two mutually exclusive projects.  The company requires any project to earn at least 12%. The manager believes that cash inflows from the project can be reinvested at the rate of 12%. Which project will the manager likely choose?

Quizplus · Accepted Answer

The manager should choose Project A because it has a higher net present value (NPV) than Project B when discounted at a rate of 12%. This indicates that Project A will generate more value for the company than Project B. Additionally, since the required rate of return is 12%, and the manager believes that cash inflows can be reinvested at 12%, it makes sense to choose the project with the higher NPV.

A Division Manager Is Choosing Between Two Mutually Exclusive Projects