Two projects being considered by a firm are mutually exclusive and have the following projected cash flows: $$\begin{array} { | c | c | c | }
\hline \text { Year } & \text { Project A } & \text { Project B } \
\hline 0 & - \$ 100,000 & - \$ 100,000 \
\hline 1 & \$ 39,500 & 0 \
\hline 2 & \$ 39,500 & 0 \
\hline 3 & \$ 39,500 & \$ 133,000 \
\hline
\end{array}$$ Which project(s)should be accepted?
A)A, because it has a shorter payback period.
B)B, because it has a higher IRR.
C)Indifferent, because the projects have equal IRRs.
D)Include both in the capital budget, since the sum of the cash inflows exceeds the initial investment in both cases.
E)Choose neither, since their NPVs are negative.

Question

Two projects being considered by a firm are mutually exclusive and have the following projected cash flows: $$\begin{array} { | c | c | c | } 
\hline \text { Year } & \text { Project A } & \text { Project B } \
\hline 0 & - \$ 100,000 & - \$ 100,000 \
\hline 1 & \$ 39,500 & 0 \
\hline 2 & \$ 39,500 & 0 \
\hline 3 & \$ 39,500 & \$ 133,000 \
\hline
\end{array}$$ Which project(s)should be accepted?
A)A, because it has a shorter payback period.
B)B, because it has a higher IRR.
C)Indifferent, because the projects have equal IRRs.
D)Include both in the capital budget, since the sum of the cash inflows exceeds the initial investment in both cases.
E)Choose neither, since their NPVs are negative.

Quizplus · Accepted Answer

Project B should be accepted because it has a higher Internal Rate of Return (IRR) compared to Project A.

Two Projects Being Considered by a Firm Are Mutually Exclusive