Tara is evaluating two mutually exclusive capital budgeting projects that have the following characteristics: If the firm's required rate of return (r) is 10 percent, which project should be purchased?

Question

Tara is evaluating two mutually exclusive capital budgeting projects that have the following characteristics:  If the firm's required rate of return (r) is 10 percent, which project should be purchased?

Quizplus · Accepted Answer

The best choice is to accept Project Q, because its NPV is $2,558.60, while Project R has an NPV of only $1,974.06. Additionally, the IRR for Project Q is lower than the required rate of return, indicating that the project will generate a return that exceeds the cost of capital. However, the IRR for Project R is higher than the required rate of return, indicating that the project is not generating sufficient return to cover its cost of capital. Therefore, Project R should be rejected.

Tara Is Evaluating Two Mutually Exclusive Capital Budgeting Projects That