Two projects being considered are mutually exclusive and have the following cash flows: $\begin{array}{lll}
\underline{\text { Year }} & \underline{\text { Project A}} &\underline{\text { Project B}}\
0 & -\$ 50,000 & -\$ 50,000 \
1 & 15,625 & 0 \
2 & 15,625 & 0 \
3 & 15,625 & 0 \
4 & 15,625 & 0 \
5 & 15,625 & 99,500
\end{array}$ If the required rate of return on these projects is 10 percent, which would be chosen and why?
A)Project B because of higher NPV.
B)Project B because of higher IRR.
C)Project A because of higher NPV.
D)Project A because of higher IRR.
E)Neither, because both have IRRs less than the cost of capital.

Question

Two projects being considered are mutually exclusive and have the following cash flows: $\begin{array}{lll}
\underline{\text { Year }} & \underline{\text { Project A}} &\underline{\text { Project  B}}\
0 & -\$ 50,000 & -\$ 50,000 \
1 & 15,625 & 0 \
2 & 15,625 & 0 \
3 & 15,625 & 0 \
4 & 15,625 & 0 \
5 & 15,625 & 99,500
\end{array}$ If the required rate of return on these projects is 10 percent, which would be chosen and why?
A)Project B because of higher NPV.
B)Project B because of higher IRR.
C)Project A because of higher NPV.
D)Project A because of higher IRR.
E)Neither, because both have IRRs less than the cost of capital.

Quizplus · Accepted Answer

Project B has a higher NPV when discounted at 10% due to the large cash inflow in year 5, despite having no cash inflows in the earlier years.

Two Projects Being Considered Are Mutually Exclusive and Have the Following