Matt is analyzing two mutually exclusive projects of similar size and has prepared the following data. Both projects have 5 year lives. Matt has been asked for his best recommendation given this information. His recommendation should be to accept:

A) project B because it has the shortest payback period.
B) both projects as they both have positive net present values.
C) project A and reject project B based on their net present values.
D) project B and reject project A based on other criteria not mentioned in the problem.
E) project B and reject project A based on both the payback period and the average accounting return.

Question

Matt is analyzing two mutually exclusive projects of similar size and has prepared the following data. Both projects have 5 year lives. Matt has been asked for his best recommendation given this information. His recommendation should be to accept:

A) project B because it has the shortest payback period. 
B) both projects as they both have positive net present values. 
C) project A and reject project B based on their net present values. 
D) project B and reject project A based on other criteria not mentioned in the problem. 
E) project B and reject project A based on both the payback period and the average accounting return.

Quizplus · Accepted Answer

The best recommendation is to accept project A and reject project B based on their net present values. Both projects have positive net present values, but project A has a higher net present value, indicating that it will generate more value for the company. The payback period and average accounting return are not the best criteria to make a decision between mutually exclusive projects, as they do not consider the time value of money and the cash flows beyond the payback period. The net present value takes into account all cash flows of the project and considers the time value of money, making it the best criterion to evaluate projects.

Matt Is Analyzing Two Mutually Exclusive Projects of Similar Size