ABC Ltd and DEF Ltd are each considering the same two investment projects;Project G and Project H.These two projects are mutually exclusive.The cash flows produced by each project are the same for both companies.These cash flows are given below: The required rate of return of ABC Ltd is 6.3% whilst the required rate of return of DEF ltd is 4.1% pa.The IRR is Project G is 7.27% whilst the IRR of Project H is 7.87%.Which project should each company invest in if they wish to maximise shareholder wealth?
A)ABC Ltd should chose Project G and DEF Ltd should chose Project G.
B)ABC Ltd should chose Project H and DEF Ltd should chose Project H.
C)ABC Ltd should chose Project H and DEF Ltd should chose Project G.
D)ABC Ltd should chose Project G and DEF Ltd should chose Project H.

Question

ABC Ltd and DEF Ltd are each considering the same two investment projects;Project G and Project H.These two projects are mutually exclusive.The cash flows produced by each project are the same for both companies.These cash flows are given below:  The required rate of return of ABC Ltd is 6.3% whilst the required rate of return of DEF ltd is 4.1% pa.The IRR is Project G is 7.27% whilst the IRR of Project H is 7.87%.Which project should each company invest in if they wish to maximise shareholder wealth?
A)ABC Ltd should chose Project G and DEF Ltd should chose Project G. 
B)ABC Ltd should chose Project H and DEF Ltd should chose Project H. 
C)ABC Ltd should chose Project H and DEF Ltd should chose Project G. 
D)ABC Ltd should chose Project G and DEF Ltd should chose Project H.

Quizplus · Accepted Answer

ABC Ltd should choose Project H as its IRR (7.87%) is greater than its required rate of return (6.3%). This means that the project is expected to generate a return in excess of what ABC Ltd requires, resulting in an increase in shareholder wealth. 
DEF Ltd should choose Project G as its IRR (7.27%) is greater than its required rate of return (4.1%). This means that the project is expected to generate a return in excess of what DEF Ltd requires, resulting in an increase in shareholder wealth. Choosing Project H would result in a lower return than what DEF Ltd requires, resulting in a decrease in shareholder wealth. Therefore, maximizing shareholder wealth requires ABC Ltd to choose Project H and DEF Ltd to choose Project G.

ABC Ltd and DEF Ltd Are Each Considering the Same