Tara is evaluating two mutually exclusive capital budgeting projects that have the following characteristics: Cash Flows
$\begin{array}{ccc}
\underline{\text { Year} }&\underline{\text { Project Q}} &\underline{ \text { Project R}}\
0 & \$(4,000) & \$(4,000) \
1 & 0 & 3,500 \
2 & 5,000 & 1,100\
\
\text {IRR}&11.8\%&12.0\%
\end{array}$ If the firm's required rate of return (r) is 10 percent, which project should be purchased?
A)Both projects should be purchased, because the IRRs for both projects exceed the firm's required rate of return.
B)Neither project should be accepted, because the IRRs for both projects exceed the firm's required rate of return.
C)Project Q should be accepted, because its net present value (NPV) is higher than Project R's NPV.
D)Project R should be accepted, because its net present value (NPV) is higher than Project Q's NPV.
E)None of the above is a correct answer.

Question

Tara is evaluating two mutually exclusive capital budgeting projects that have the following characteristics: Cash Flows
$\begin{array}{ccc}
\underline{\text { Year} }&\underline{\text { Project Q}} &\underline{ \text { Project  R}}\ 
0 & \$(4,000) & \$(4,000) \
1 & 0 & 3,500 \
2 & 5,000 & 1,100\
\
\text {IRR}&11.8\%&12.0\%
\end{array}$ If the firm's required rate of return (r) is 10 percent, which project should be purchased?
A)Both projects should be purchased, because the IRRs for both projects exceed the firm's required rate of return.
B)Neither project should be accepted, because the IRRs for both projects exceed the firm's required rate of return.
C)Project Q should be accepted, because its net present value (NPV) is higher than Project R's NPV.
D)Project R should be accepted, because its net present value (NPV) is higher than Project Q's NPV.
E)None of the above is a correct answer.

Quizplus · Accepted Answer

Project Q should be accepted because, although both projects have IRRs greater than the required rate of return, the NPV method is more reliable for mutually exclusive projects. Calculating the NPVs at a 10% discount rate will show that Project Q has a higher NPV than Project R.

Tara Is Evaluating Two Mutually Exclusive Capital Budgeting Projects That